July 22, 2021

Tax planning is an important part of financial planning and that’s why it should be properly analyzed before implementation. But most of the people keep tax planning in their waiting section of to do list and when the financial year is about to end, they will scramble to search the various ways of tax deduction and will end up in unfruitful investments. That’s why an early planning is necessary for choosing a better tax saving instrument which will allow you to meet your financial goals easily. When it comes to choosing the best tax saving instruments, then the decision is all based upon your need and situation, but knowing the various tax saving instrument is also very necessary so that you can choose the best one for yourself.

That’s why we have mentioned the 7 most effective tax saving instruments to cut your outgo

1. Life Insurance

Life insurance acts as one of the most effective and secure tax saving instruments. The sole purpose of life insurance is to give financial security to the family of the policyholder in case of his absence, but in addition to the life cover, a life insurance policy offers you tax deductions also. According to section 80C, the premium paid towards buying or keeping a life insurance policy active is tax deductible and the maximum limit for tax deduction is 1.5 lakh, and according to section 10 (10D), the amount received in the form of death benefit is also tax deductible.

2. Health Insurance

Life insurance is not the only insurance product which gives you a tax benefit as a health insurance policy also offers you various ways of tax saving. According to section 80D of Income Tax Act, 1961, the premiums paid towards health insurance policy are tax deductible. Following are the different limit of the tax deduction under section 80D

Person covered Tax Limit
Self and Family Rs.25,000
Self and Family + Parents Rs.25,000 + RS.25,000
Self and Family+ Senior Citizen Parents Rs.25,000 + Rs.30,000
Self and Family (anyone of them is a senior citizen)+ Senior Citizen Parents Rs.30,000 + Rs.30,000

3. ULIPs

ULIP offers you long term investment options with tax free returns.  The premium paid in ULIP is invested in equity and debt, according to the risk appetite of the policyholder.

According to section 80C of Income Tax Act, 1961, the premium paid towards ULIP is tax deductible and withdrawals in the form of death benefit, maturity benefit or partial withdrawal at the discretion of the policyholder is tax deductible under section 10(10D).

4. Public Provident Fund (PPF)

PPF is a long term saving scheme by the government which comes with a block in period of 5 years for withdrawal. The PPF account matures after 15 years from the date of opening and it is considered as one of the most preferred tax saving instrument. The PPF account can be opened in a post office or bank, in which you can spend from Rs.500 to Rs.1.5 lakh. Tax deduction in PPF is given under section 80C of Income Tax Act,1961. The investment (up to 1.5 lakh),  interest earned and  maturity received under PPF is free from any tax liability.

5. New Pension Scheme (NPS)

New Pension Scheme is one of the best tax saving instrument which can help you with your retirement planning also. New Pension Scheme is famous for its low cost structure and flexibility.  It is a market linked product and therefor it offers returns based on the fund performance. The total deduction allowed in the scheme under section 80C and 80CCD is Rs.2 lakh. All the contribution to New Pension Scheme up to Rs.1.5 lakh is not taxable. The NPS has two tiers, Tier 1 and Tier 2, and you should know that a subscriber cannot withdraw from Tier 1 account which has been made for retirement saving, he or she can avail tax benefit in Tier 2 account.

6. Equity Linked Tax Saving Scheme (ELSS)

ELSS is one of the best tax saving instrument because of high return and lowest lock in period of 3 years, which is the shortest period among all tax saving instruments. It also offers the flexibility of investing just Rs.500. Investment of up to 1.5 lakh can earn a tax benefit under section 80C. The money invested in ELSS grows with investment in equity market, which offers long term capital gain without any tax liability. You are also not bound to keep investing after the lock in period as in the case of a pension plan.

7. Tax Saving FDs

Taxes saving FDs are considered as one of the easiest tax saving instrument which comes with a lock in period of 5 years and tax deduction under section 80C on investment up to 1.5 lakh. The return on tax saving FDs varies from bank to bank and ranges between 7-9%. With 100% capital protection, FD also offers you  guaranteed returns. But after maturity, the interest is added to the investor’s taxable income.

Snapshot of the 7 mentioned above tax saving intruments:

Tax Saving Instrument Interest Lock-in Period
Life Insurance Policy 5.5 – 6% 2 years
ULIPS 8 – 10% 5 years
PPF 8.1% 15 years
NPS 8 – 10% Till Retirement
ELSS 12 – 15% 3 years
Tax saving FDs 7 – 9% 5 years

So don’t put your tax planning in the pending section of to do list because choosing tax saving instruments in a hurry can result in a wrong decision which will never fulfill your financial goals. Analyze the above mentioned tax saving instruments and choose the best one for yourself, according to your need and situation.

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