Understanding Tax Savings in India | 2020

tax savings in India

“The hardest thing in the world to understand is the income tax” 

-Albert Einstein 

Income tax is a fundamental duty that you as an Indian fulfills every year. But sometimes, paying income tax at the end of financial years is quite a challenge for some people as there comes the submission of various insurances and rent receipts. But there are many ways through which you could cut down on taxes and save them. Then again, we don’t intend to tell you to do something illegal as paying tax is what contributes to growth of your country and economy both. So it becomes important to check all the ways to save tax. In order to understand how much one can save on taxes, it is important to understand the slabs too. 

As an investor you should look for investment options that not only help you save tax, but also generate tax-free income. Now you want to consider some factors such as safety liquidity and turns when you choose the right option. But it is also important for you to understand how your returns would be taxed. If the income that you earn is taxable. The scope to make more money gets constrained the taxes are most likely to eat into your returns. 

As you might know, based on the annual income the people are divided into income tax slabs. The tax payers pay according to the category they come in. So, if you are really willing to save on your taxes which eventually every one wants to do, you can invest your finances in markets or put them in policies for future. 

The ways are as follows: 

● INSURANCE Buying insurance policies has many many benefits. It helps you to make sure that you don’t spend a lot of money while you’re in crisis. But the major benefit of insurance is that it helps you save on taxes. Consider the following: ✧ Life insurance – Life insurance policies provide coverage to an individual and are also an excellent way to save on taxes. In an insurance policy, one pays the premiums every year which is paid back in large amount in case of demise of the policy holder. Under this insurance you are liable to pay taxes which have to be deducted under section 80C of income tax act. ✧ ULIPs Unit linked insurance plan are insurance plans which are market linked. This plan enables investors to be get the benefit of both investment and protection under single plan. Obviously, the investments are liable to tax deductions. This opportunity helps your money to grow.

Health insurance

As you know, the cost of medical treatment and medical care is rising rapidly and accelerating prices of the same have made it necessary to buy an health insurance. Health insurances make sure that you have enough money and finances to take care of your medical expenses. If you pay premiums for your health insurance, then you could save taxes upto 15-20k. 

INVESTMENTS

Investments are financial tools which help you invest today and reap benefits later. Common investment options are: 

✧ Mutual funds

Money pooled by a large number of people makes mutual funds which is managed by a professional fund manager. They collect money from a number of investors who share a common investment goal. Each investor owns what is called unit as a representation of the portion they hold. Hence, the income generated is distributed amongst them proportionally. 

✧ ELSS Equity linked saving schemes can be used to gain tax reduction benefit. ELSS comes with a period for lock in of 3 years. This period is less as compared to fixed deposits and PPF’s. Major benefit of mutual funds are that they offer a huge return on investment. 

✧ Tax saving fixed deposit Fixed deposit offered by different banks helps you save tax. You put the amount of 1 lakh rupees to 1.5 lakh rupees in these and gain an attractive and appealing interest along with the benefit of tax saved that particular year. This method comes with a lock in period of 5 years. 

✧ Post office time deposit Post office time deposit is almost same as fixed deposit but with a condition as to how much money a person can put in. The minimum amount that you need to put in this is 200 rupees. Interest rate is 8.5% per annum. The lock in period is 5 years and tax deductions are answerable to the legalities under section 80C of income tax act. 

✧ National savings certificate National savings certificate can be taken advantage from the post office. Minimum investment of 100 rupees need to be done by the person. The lock in period is 5 years and also 10 years. Investment made under NSC are eligible for tax exemptions. 

✧ Provident fund They are also known as pension funds as they are created with the goal for a long term return.Under this scheme you are liable to pay taxes which have to be deducted under section 80C of income tax act. 

● LOANS Home loans for construction or buying a house.I know every one of us is looking for options to save extra money and saving on taxes is one way to do it. You can cut on the amount you pay for the tax. And hence, you can earn extra money, which is actually what you save. Tax liability is a very heavy burden for all the taxpayers be it salaried class or non salaried class. Now the Indian income tax department allows the people who paid tax to save on their taxes through different mediums, but then again it is not legal to not pay taxes but if you want to save on your taxes, you need to start tax planning in advance apart from planning. You also need to pay attention how you receive your tax returns. This is because you might reduce your tax liability this year, but the interest that you earn on your saving will convert into a tax liability at the end of the financial year. 

Now looking and searching over the Internet. You may come across some tax saving tools that help you with your tax planning and some of them come with E-E-E . It means investment accumulation and withdrawal are all tax exempted. 

While some other allow tax deduction claims and are open to all the taxpayers be it a salaried person, a business person or any other professional. Now when you talk about the income tax act the zero tax liability incomes are found under Section 10 and tax deductions are available under the section 80C. Now this is the mentality of human mind that you can remain relaxed at the beginning of the financial year and you are in no hurry to plan your finances and taxes. This mentality leads to panic and hence the rush begins. 

Now here we are mentioning some practical tools to help you in planning. Every taxpayer in any class is allowed ineligible to use these tools. However, the tools you can choose based on your requirements and needs. ∎ Equity-linked saving schemes. The equity-linked saving schemes are Diversified mutual funds. Under Section 80C one can get a benefit of up to one and a half lakhs per year. Now when you talk about returns returns can be of two types either in dividends or growth option dividends is when you are looking for a regular income and growth option is when you want a long-term savings scheme. Dividends in this scheme are not taxed. And so it becomes tax free for both the payers who might want their returns either in form of dividends or growth. 

∎ Capital gains from sale When you sell a long-term capital asset, you own a long-term capital gain. It may be a sale of equity shares or equity-linked mutual funds If you talk about long-term, it is considered a long-term asset if it is held for a period of three or more years. But according to the new budget which was effective from April 2018. The tax will be levied on your long-term capital gains. 

∎ Agricultural income If you are involved in any agriculture activities, then you are liable to be exempted from tax under the Indian income tax app. This is done to boost the agricultural sector. The income may be in the form of agricultural land or income from selling the products or from buildings of the farm and these are all not taxed. 

∎ Public Provident fund 

As you might have already heard about it. The government has introduced the public provident fund account to save on taxes. PPF suits those investors who do not want volatility and returns. However for long-term goals it is better to take equity exposure most probably through equity mutual funds including tax saving funds and you don’t want to solely depend on PPF. The returns you get on Provident fund accounts are tax-free.However, the rate of interest changes on a quarterly basis. This account can be opened by an individual in a post office, which is authorized or a bank. And it is open to people from all the ages even minors. 

∎ Education Loans The interest that you might pay on Education Loans for higher education of anyone be it you yourself your spouse or your children is tax free and no limit is set on this amount Scholarships. The scholarships which are granted to the students are Exempted from tax. The total sum is received for the scholarship purpose itself. 

∎ Donations A donation that you make for a charity cannot be taxed and can be claimed for tax deductions. For example, you might have heard of the national relief funds and when you make contribution to it, you are Exempted from paying the tax. Depending on the reason of the donation made you can get about a hundred percent reduction while it may be also 50% reduction. 

CONCLUSION Everything demands planning and proper execution. So, next time at the beginning of the financial year, make sure you plan properly and make the smartest strategies and use the best instruments for saving taxes legally. 


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