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Filing ITR is one of the most important financial responsibilities of any person earning an income, especially salaried individuals. For one to save taxes, one needs to plan their investments and other financial purchases carefully. Buying the right tax-saving plans can help you save maximum on your taxes and may also prove to be beneficial in the long term.
Here are seven tax-saving instruments that salaried individuals can choose from to save taxes.
1. Fixed Deposits
Fixed-term deposits are known to be one of the most low-risk savings tools. They are accessible to almost everyone, as all you need to create a fixed deposit account is a regular bank account. Moreover, they offer a slightly higher rate of interest as compared to savings accounts.
These deposits can be created for a certain time period as low as seven days. However, if you want to use them as a tax-saving plan, you need to take them for a period of a minimum of five years. You can get an exemption of up to 1.5 lakh per year for fixed deposits.
2. Equity-Linked Savings Scheme (ELSS)
If you have opted for the old tax regime, you will find that ELSS, i.e., Equity-linked Savings Scheme, is covered under Section 80C of the Income Tax Act, 1961. This is a type of mutual funds scheme. Hence, know that it comes with a certain degree of risk. However, you can minimise it by choosing low-risk funds, such as debt funds.
You can use an income tax calculator to figure out how much your ELSS investments can save you in taxes annually. A maximum exemption of Rs. 1.5 lakhs is allowed if you have opted for an Equity-linked Savings Scheme.
3. Public Provident Fund (PPF)
Public Provident Fund, colloquially known as PPF, is a savings tool offered by the Government of India, which can also be used as a tax-saving plan. The minimum amount which you can deposit in a PPF account annually is Rs. 500. The maximum amount permissible is Rs. 1.5 lakhs.
The PPF account matures after 15 financial years. However, you can make withdrawals starting in the seventh year. Loan facilities are available from the third year up till the sixth year.
4. Unit-Linked Insurance Plans (ULIPs)
Unit-linked Insurance Plans, or ULIPs, are commonly known to be life insurance plans with the added advantage of market-linked wealth creation. What many may often forget is that they can also be used as tax-saving plans. Under Section 80C of the Income Tax Act, 1961 in India, you can claim an exemption on your ULIP premiums up to Rs. 1.5 lakhs per annum. You can add your ULIP premiums to your income tax calculator to see how much you can save. Moreover, the returns earned from ULIPs are also tax-free.
5. Term Life Plans
These plans are also commonly looked at as a life insurance policy, but people often forget that these can also work as tax-saving instrument. You can earn tax exemptions on the premiums paid for these plans, as well as on the benefits received. Under Section 80C of the Income Tax Act, 1961, premiums of up to Rs.1.5 lakhs can help you earn tax benefits annually.
Term life insurance plans are also known to be affordable, especially as compared to other types of life cover. Alongside earning tax exemptions, they can help you offer support to your family in their times of need.
6. National Pension Scheme (NPS)
The National Pension Scheme is commonly defined as a voluntary contribution pension scheme. It is offered by the Government of India and is open to all Indian citizens between the ages of 18 to 70 years. It is meant for individuals who are looking to start saving for their post-retirement life and want to receive a pension. Contributions for Tier-I NPS accounts could start as low as Rs. 6000 per year.
Apart from being a pension scheme, NPS also acts as a tax-saving plan. The ceiling for tax exemption with this plan is 10% of the salary of the individual (basic and DA). The overall ceiling for the same is Rs. 1.5 lakhs.
Health Insurance
Getting health insurance can be a crucial part of your overall financial planning. Healthcare costs have been increasing over the past years and the pandemic has made most people more aware of their healthcare needs. In such cases, it can prove to be quite helpful to have health coverage.
However, buying health insurance gives you more than just health cover. It can also earn you tax exemptions. Under Section 80D, you can earn exemptions on the premium amount you pay. Thus, your health insurance can also work as a tax-saving plan.
It is necessary to remember that if you have opted for the new tax regime, these plans may not help you earn any tax deductions. Most of these tax exemptions granted by the Income Tax Act, 1961, are applicable only to those who are continuing with the old tax regime.
You can choose one of these plans, or a combination of these to help you earn tax exemptions. If you are worried or confused about how to navigate tax-saving instruments, such as life insurance, NPS, and more, you may consult your tax advisor.
