Income Tax

7 Tax Saving Investment Plans and Options

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Many people in the country consider tax planning as one of the judicious tasks and thus, start planning for it at the eleventh hour when the financial year is about to end. But this doesn’t leave enough space for smart planning. In fact, one must prepare for the tax-saving season beforehand and start investing in the early quarters of every financial year. By early planning, you will get time to go through various tax saving plans and options and can choose one which you think will work best in your case. By being proactive, you can also minimize your tax outgo and save big for your future.

Currently, there are quite a lot of smart tax-saving options with which you can reduce your tax outgo and save more on your income. The 7 most prominent investment plans and options are listed below:

  1. Life insurance: Though it is not the purest form of tax-saving instrument but the dual-edged benefits it offers certainly makes it to the top of this list. A life insurance provides life cover that acts as a financial assistance in case of emergency. Moreover, the premium you pay each month for your life cover is deductible from your income u/s 80C of Income Tax Act. The maximum deduction of Rs.1 lakh can be claimed from the life insurance policy. That’s not all, under section 10(10D), an amount that is paid to the beneficiary in case the emergency is exempted from tax. In case of the pension plan, the 1/3rd of the total maturity amount is paid out in an emergency. This amount is tax-free but the remaining 2/3rd of the amount that is paid during annuity is tax-payable.

  1. Equity-Linked Savings Scheme (ELSS):- The Equity-Linked Savings Scheme is one of the most sought-after mutual fund investment plan specifically designed for tax-saving purpose. As ELSS is a market-linked product, it comes with high-risk factors and offers high returns as well. The income earned through ELSS is tax deductible u/s 80c of the I-T Act 1961. There are two reasons for mentioning ELSS in this list. One is that it comes with the shortest lock-in period of three years and second, it is the equity-based investment. Also, investment in ELSS can be done via SIPs. It is, by and large, an easy and effective method to save tax.
  2. National Pension Scheme: – It is yet another tax-saving investment that allows investors to go beyond Rs.1 lakh tax deduction limit set by the section 80c of Income Tax Act. Moreover, under the government-owned national pension scheme, the 10% of your basic salary, which is the employer’s contribution towards your pension scheme, is tax deductible.
  3. Public Provident Fund (PPF): – For years, the Public Provident Fund has been acknowledged as one of the popular tax-savings scheme by several investors. Reason being, the principal and the returns earned from this scheme not only ensure guarantee but are tax-free as well. PPF offers 7.6 percent interest on the savings per annum. For someone falling under the highest income slab pays 30.9 percent tax, it translates to nearly 11.28 percent taxable return, which is significantly higher than any other tax saving investment plan. PPF is a 15-year plan which can be extended for an indefinite period of five years. Investors keen to enroll in the public provident fund scheme can visit the designated post office or the bank branch, fill up the application form and sign up for the scheme. Few banks also provide online facility to open a PPF account. Also, individuals are allowed to transfer their existing PPF account from a bank to post-office and vice-versa. There is no age limit associated with PPF account. Anyone can open a PPF account. In fact, EPF account holders can also open a PPF account.
  4. Employee Provident Fund (EPF): EPF is yet another tax-saving investment option that helps salaried individuals not only save tax but accumulate tax-free corpus as well. As a general rule, an employer contributes 12% of the employee’s basic salary every month as a mandatory contribution towards EPF. In return, an equal share is contributed by the employer as well towards an employee’s EPF account, but only 3.67% is added to the EPF. However, only employee’s contribution up to a limit of Rs.1.5 lakh in the EPF account qualifies for tax exemption of u/s 80C of the I-T Act 1961. Plus, both employee and employer share in the EPF account earn interest each year as per the government norms, which is completely tax-free. The rate of interest applicable on EPF account in the FY 17-18 will be reduced to 8.55% from 8.65% in the FY 16-17.
  5. Unit Linked Insurance Plan (ULIPs):- It is a perfect amalgamation of safety and saving. On one hand, ULIP provides life cover while on the other it helps investors put their savings into various market-based assets for meeting long-term perspectives. A majority of Unit-linked Insurance Plans provide 5 to 9 investment options with different asset allocation involving equity and debt. A ULIP can be operational for more than 20 years but it comes with five years of lock-in period after which one can exit the policy if he wishes to. The interest earned from the fund on exiting the policy after 5 years or on maturity is exempted from tax.

Sukanya Samriddhi Yojana (SSY): It is a small savings schemes specifically meant for a girl child below 10 years of age. Offered at an interest rate of 8.1% (with effect from​ 1-01​-2018​​), the Sukanya Samriddhi Yojana is aimed at providing ample of tax benefits. Parents and local guardians can open the scheme in the name of their girl child anytime after the birth and till she turns 10 by depositing a minimum of Rs.1000/-. Plus a maximum of Rs.1.5 lakh can be deposited in this scheme every financial year. The maturity period of SSY is 21 years. One can also close the account in 18 years, but on one condition that the girl on whose name the account was opened should be married by then. Currently, the Sukanya Samriddhi Yojana offers higher returns on the investment. The contribution made towards SSY annually qualifies for Section 80C benefit and the maturity benefits are completely exempted from tax.

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Paying Income Tax Online- A Boon or Bane

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A majority of salaried individuals tend to get worried when they see the TDS deduction on their pay slip and most wish that taxes were lower. This year the government seems to have heard this vast majority as the lowest income tax rate was effectively halved from the earlier 10% to 5%. But it is easy to forget that it’s not just the salaried individuals that have to worry about paying income tax as even self employed as well as corporations are liable to pay income tax. Through the years, various changes have been introduced in the way taxes are calculated, collected and paid, so let’s see if these changes including paying income tax online have been a boon or a bane for the stakeholders.   

Fewer Paper Documents

The pinnacle of achievement for a digital society, according to many thought leaders, is a paperless existence. We in India might not be there yet, but with the introduction of the online income tax payment system, the submission of paper documents has definitely been eliminated to a large extent. In the past, everything required a paper submission and copies of these had to be stored carefully by the tax payer for up to 5 years in case there was an audit requirement. Moreover, when submitting these documents to the Income Tax Department, a prescribed order had to be followed and in case of a mistake, the papers often had to be filed anew. Thankfully these problems are in the past if you have been paying or have started paying your income tax online. The online system does not need any reordering of papers and in case you make a mistake while filling out the form, the error will get marked automatically allowing you to make the changes immediately. Additionally, rectifications and re-submissions too are a breeze as new documents just need to be submitted as scanned copies if required by the IT Department and not otherwise.

Quicker Turnaround

When paper documents are submitted, they have to be verified one at a time by hand and this requires a lot of time and effort. The online system uses interlinked databases like TRACES that automatically check the tax payer’s entries by running it through multiple databases simultaneously without any human intervention. The system automatically flags errors/mistakes/mismatching data based on the entries available on the various interlinked databases vs. the forms submitted by the income tax assessee. In case an error is detected by the system and the submission is flagged, the form is checked manually. Thus the system of paying income tax online saves time and there is lesser scope of errors creeping into the process.

Cheaper Cost of Collecting Tax

The old system of collecting taxes often required multiple tax collectors knocking on the tax payer’s door or sending out multiple notices to make errant individuals pay their taxes. Then there was the paperwork that had to be sorted through sometimes more than once to ensure that everything was in order. This required not just time but also an army of clerks, assistants, paper pushers, stenographers and so on. For the government especially the IT department, this was a problem because all these employees had to be paid out of the government’s coffers and thus the efficiency of income tax collection was quite low in the pre-digital age. When a tax assessee pays his/her income tax online, it no longer requires such a large workforce to corroborate these requirements due to the higher levels of automation that the online system provides.

Conclusion: Definitely a Boon

From the above points it is easy to conclude that the introduction of the system that allows individuals to pay income tax online is nothing short of godsend. The system is indeed a boon for both tax payer and the collection agency.  Furthermore, the system will work even better as it gets even more streamlined in the future with the introduction of more efficient systems and technologies.