Know How to Save Taxes in this Financial Year!
Though investments help you grow wealth, the income that you earn from your options may be taxable. Hence, making investment decisions based on the tax incidence will allow you to enjoy maximum post-tax returns. There are a number of investment options that offer lucrative tax benefits and offer massive returns at the same time. Take note of such tax-saving investment options to make the most of your money.
Equity Linked Savings Schemes (ELSS)
These are open-ended equity mutual funds that have a lock-in of 3 years. Thanks to the equity dominance, ELSS offer the potential to grow your money throughout the holding period, which also means that risk is a given. If you wish to grow your money further, you can extend your holding period for up to 7 years. ELSS offers a dividend and growth option. Choose the former if you wish to enjoy regular income, which is unassured, and the latter if you wish to invest for long-term. What sets ELSS apart from other mutual funds is the lucrative tax benefits that it offers.
- Your investments of up Rs.1.5 lakh per year are eligible for a tax deduction under Section 80C.
- ELSS gains equal to or less than Rs.1 lakh are tax-exempt. Anything beyond is subject to LTCG tax at 10%.
- ELSS with dividends are subject to a dividend distribution tax of 10%. So, choosing the growth option can give you better post-tax returns.
Public Provident Fund (PPF)
Since its inception in 1968, the Public Provident Fund has consistently been and is still a darling investment avenue for all investors. It owes this reputation to its tax benefits, safety, and an attractive interest rate. You can make a minimum deposit of Rs.500 a financial year in a PPF account and the maximum is limited to Rs.1.5 lakh. The interest rate is subject to change every 3 months; currently, it is 8%. Although a PPF account has a lock-in period of 15 years, you can enjoy liquidity by applying for a loan against it starting from the 3rd year right up to the 6th year. You can also make provisional withdrawals after 5 years. To continue enjoying the benefits, you can extend your PPF in blocks of 5 years.
- PPF enjoy EEE tax status, meaning you can claim a tax deduction on your deposits each financial year under Section 80C and a tax exemption on interest income and maturity proceeds.
Fixed deposit (FD)
Perhaps the oldest form of investment in the country, an FD is known for its safety and assured returns. While the fixed deposit interest rate varies across issuers, usually company deposit offers higher rates than banks and post offices. For instance, the Bajaj Finance FD offers an interest rate of up to 8.75% on an FD started for at least 36 months with interest payable at maturity. This rate goes up to 9.10% for senior citizens. Apart from this, Bajaj Finance offers an additional 0.25% rate on the renewal of an FD to encourage you to reinvest your proceeds. While a tax saving FD offers certain tax breaks in the sense that you can claim a tax deduction under Section 80C while making an investment, your FD income is fully taxable as per your slab.
- Prior to the Interim Budget 2019 announcement, banks and post offices deducted TDS on your FD interest earning in excess of Rs.10,000. The threshold is now proposed to be increased to Rs.40,000. The limit remains unchanged for senior citizens at Rs.50,000. In the case of company FDs, the TDS limit is Rs.5,000.
- TDS is deducted on FD interest income at 10% (in case you have submitted your PAN details) and 20% (if you haven’t) by the issuer.
- You pay tax on FD interest as per your tax slab after adding it to your taxable income. The total amount you pay is the balance due after taking TDS into consideration.
- You can easily estimate your interest and tax applicable by using the online fixed deposit calculator.
Sukanya Samriddhi Yojana (SSY)
SSY is a government-backed small savings scheme meant for your girl child. Apart from yielding a high-interest rate, SSY also offers lucrative tax benefits. You can open a Sukanya Samriddhi Account any time till your daughter turns 10 by paying a minimum of Rs.250. Thereafter, the minimum deposit is set at Rs.250 and maximum of Rs.1.5 lakh per financial year. Though the deposit payment period is 14 years, an SSY account has a lock-in period of 21 years or till your daughter turns 18. Like PPF the SSY interest rate changes quarterly and currently earns 8% interest.
- SSY enjoys EEE tax status, meaning you can claim a tax deduction on your deposits under Section 80C and a tax exemption on interest income and maturity proceeds.
National Savings Certificate (NSC)
Offered by the post office, the National Savings Certificate offers tax benefits, guarantees an attractive yield and promises you safety. You can make a minimum investment of Rs.100 in NSC. Unlike most investment avenues, NSC has no maximum investment limit; the only condition is that your investment should be in multiples of 100. Your investments are locked in for 5 years and currently earns at the rate of 8%.
- Your investment amount is eligible for a tax deduction under Section 80C for up to Rs.1.5 lakh.
- The interest is reinvested in NSCs and hence you can claim tax exemption on interest earned in one year in the next year. However, the interest earned in the last year is taxable as it is not reinvested.
With these 5 options, you can balance your risk and achieve your goals without also saving on tax this season.