Income Tax Saving Schemes: Instruments which can help you save tax

The ongoing financial year 2021-22 (FY22) is set to end in a few days and there are many taxpayers who tend to make their investments in the last month of the fiscal. There may be some taxpayers who might have switched their jobs during the current financial year for a better salary which would essentially mean that their tax liabilities may have gone up and they might have to make more investments to claim a higher tax deduction.

There are various investment schemes that can help you in reducing your tax liabilities and most of them provide savings under Section 80C of the Income Tax Act. Section 80C includes multiple investments through which you can claim deductions on your total income. However, this is up to a limit of Rs 1.5 lakh in a financial year. This apart there are provisions under Section 80D wherein you can save tax up to Rs 1 lakh.

Here are the top tax saving instruments that can be considered while making your tax-saving investments:

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term tax-saving instrument that provides an excellent rate of return on investment. It has a lock-in period of 15 years from opening the account and the interest and refunds are tax-free under the Income Tax Act. Additionally, the amount that is deposited during the financial year can be claimed under Section 80C.

The minimum contribution for the PPF account is Rs 500 and a maximum of Rs 1,50,000 in a financial year. Also, the deposit can be made in lump-sum or in ​installments. However, investors should note that if they fail to make a bare minimum investment of Rs 500 in their PPF account by the end of a fiscal, then they’ll have to pay a Rs 50 penalty for the previous year as well a Rs 500 arrear subscription for that year.

At present, the interest rate on PPF stands at 7.1 per cent per annum which is compounded annually.

National Savings Certificate (NSC)

National Savings Certificate (NSC) has a tenure of five years and comes with a fixed interest rate. This can be opened at any nearby post office and in the present scenario provides a comparatively higher interest rate than a bank fixed deposit (FD).

Investors need to invest a minimum of Rs 1,000 and then in multiples of Rs 100 (such as Rs 1,100, 1,200 and so on) and there is no maximum limit.

This instrument too comes under the Rs 1.5 lakh bracket of Section 80C. Currently, the interest rate available on NSC is 6.8 per cent which is compounded annually but payable at maturity, according to the information available on India Post’s website.

National Pension System (NPS)

National Pension Scheme (NPS) is a kind of voluntary retirement savings scheme which is regulated by the Pension Fund Regulatory and Development Authority. Investors can earn deductions under Section 80C.

This scheme is available for all the employees from the public, private and even the unorganised sector and allows the subscriber to make a defined contribution towards planned savings thereby securing their future in the form of pension.

NPS allows people to invest in a pension account throughout their employment till the age of retirement. On retirement, investors can withdraw a certain percentage of the total corpus. The NPS subscriber will receive the remaining amount of the corpus as a monthly pension after retirement.

Anyone who applies for NPS should be aged between 18–70 years as on the date of submission of his/her application, according to details given in India Post.

This particular scheme can be ported across jobs and locations and in terms of tax benefits, it provides tax deduction up to 10 per cent of Salary (Basic+DA) under Section 80 CCD(1) within the overall ceiling of Rs 1.50 lakh under Sec 80 CCE. The employee is also eligible for tax deduction up to 10 per cent of Salary (Basic+DA) contributed by the employer under Sec 80 CCD(2) over and above the limit of Rs 1.50 lacs provided under Sec 80 CCE.

Tax saving FDs

The tax saver fixed deposit (FD) is one that has a tenure of five years and carries a fixed rate of interest. By investing in a five-year FD, an individual can claim tax benefits under Section 80C up to Rs 1.5 lakh.

These FDs can be opened from any public or private sector lender but the interest rates offered varies from bank to bank. This apart, it must be noted that although this financial instrument is going to provide a tax benefit to the individual, TDS from the interest on these FDs is applicable at the time of maturity.

Home loan payment

If you bought a house and have a home loan to repay, then the EMI portion of the principal amount is allowed for tax deduction under Section 80C.

Life insurance premiums

The premiums paid for different types of insurance policies such as unit-linked insurance plans (ULIPs), endowment policies and term insurance provide tax benefits up to Rs 1.5 lakh.

Health insurance premium

Apart from all the instruments mentioned above which come under Section 80C, if you purchase a health insurance then you can save over and above your limit of Rs 1.5 lakh. Under Section 80D, you can claim up to Rs 1 lakh in tax deductions for medical insurance premium payment.

Tax deduction of Rs 25,000 is given for self, spouse, and dependent children and for senior citizens it is Rs 50,000.

Additionally, payments for certain medical tests also come under this category.

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