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The time of year has arrived, and we are most likely a little reluctant to pay taxes and that’s understandable. If you’ve been looking for ways to save tax and the right investments that could help you do just that, let’s explore where to invest to save tax this year.
You shouldn’t be stuck in some instrument that isn’t serving its purpose and you must be aware of what exactly these investments do for you and how they can help you save tax. Most people, in the name of saving taxes, are just investing in such instruments without actually making the most of them.
Here, it’s not just a matter of saving tax but other things, like what suits your condition more, because every money invested also has the potential to make a penny for you and it must be maximized depending on your goals.
Answer this checklist before you invest:
- Do you want to invest in fixed-income investments with lower risk or in equity investments with higher risk?
What you think the money must do for you can let you know the risk you want to take with it. It can also tell you what returns to expect based on the risk you are taking.
- When you invest, is it okay to forget it for a longer lock-in period or do you want it to be liquidated when you need it?
The instrument you invest in must allow you to liquidate or not, which is your choice and depends on the need for the money you have invested. This should also answer the question of the holding period of the instrument in which you are going to invest.
- Along with it serving taxation purposes, does it also serve your life goals?
As mentioned initially, your investment must not be only to save tax because the amount of time it takes to be invested must also be considered to see if it can also aid in serving your life goal.
Otherwise, the majority of people end up making two different types of investments for both purposes. Try to see if an instrument can serve both purposes together.
If you answered it for yourself, then you are aware of what you are looking forward to. Continue reading to save taxes in any way possible.
8.4% Surge in Growth Came Out as a Surprise
The Investments for Saving Taxes
The Income Tax Act under Section 80C, Section 24(b), Section 80EEA, Section 80D, Section 80CCC, 80E, and 80G can help you save taxes in some way or another. You’ll get a clear idea as you continue reading.
Note that the goal of an investment need not just be limited to making returns in addition to the tax-saving benefits but can also include investments that save lives by insuring. Having said that, let’s explore your meaningful tax-saving investments.
Insurance Investments
These are instruments that insure your health and life, which are nothing but the ones that cover your medical bills and help your beneficiary with some money after the demise. As a taxpayer, you can save tax on the premiums of health and life insurance plans as well.
1. Unit Linked Insurance Plans
The instrument, popularly known as a ULIP, is an investment cum life insurance plan where part of the money invested is for insuring your life and the remaining goes to investing in an instrument, which can either be equity, debt, or even a mix.
It comes with 2 tax benefits, one under Section 80C, which is that the premium paid towards the investment can be tax exempted for up to Rs 1.5 lakhs. ULIPs issued after 1 February 2021 with annual premiums exceeding Rs 2.5 lakh do not qualify for tax-free maturity proceeds. Gains in such policies are taxed similarly to equity mutual funds.
These two come with a little clause that needs to be met to fully benefit them. The sum assured by the insurance must be at least 10 times greater than the premium paid annually. If it is less than 10 times, then the tax benefit from Section 80C will be reduced to 10%, and the sum received after maturity will no longer be tax-free.
The returns received here are market-linked, ensuring that the cost you pay for insurance is lower and offers greater life insurance coverage. Typically, this type of instrument, with both investment and life insurance, will have lower insurance coverage. If you are the one who is looking for more coverage, then this is not the right instrument for you, rather, opt for term insurance with Section 80C benefits.
2. Health Insurance Plans
Under Section 80D, one can avail of a deduction of up to Rs 25,000 on the premium paid for health insurance if they are an individual. But suppose if it is an older person, 60 or older than 60 years, they get a tax deduction of Rs 50,000.
The tax deduction of Rs 25,000 remains the same, which includes the premium paid for a spouse, yourself, and your children.
Also, if you have incurred any expenses for the preventive health checkup, under Section 80D, you receive a tax deduction of Rs 5,000 for such an expense.
RBI’s Status Quo: No Changes in Current Policy
Loan Investments
1. Home Loan
Taking a loan comes at a bit of a cost, but government schemes like the Pradhan Mantri Awas Yojana and the Delhi Development Authority Housing Scheme incur an interest rate at a lower cost, thus making it affordable.
With that, you also get tax benefits under sections 80C and 24(b). With it, you can save tax on the principal amount paid as well as the interest paid.
So the principal you take for the home loan can be given a tax deduction of up to Rs. 1.5 lakh under Section 80C but with a clause that you should not sell it within 5 years of owning it.
Under Section 24(b), you can save up to Rs. 2 lakhs with tax deductions on the interest amount paid for your home loan. This also comes with a clause where the purpose of your loan must be either to construct or purchase a house. If it is to be constructed, then again, this construction must have been finished within 5 years after the year from when this loan was taken.
While that’s about the money you can save on principal and interest, you can additionally save under Section 80EE or 80EEA.
So if you took a loan between April 1st, 2016, and March 31st, 2017, and also if the property value is not more than 50 lakhs and the loan is not more than 35 lakhs, you get a tax deduction of Rs 50,000 as per Section 80EE, which can be claimed on the interest paid towards your home loan.
Now, if you took home a loan in the years 1st April 2019 and 31st March 2022 under Section 80EEA, you can claim a tax deduction of up to Rs 1.5 lakhs on the interest paid if the property’s stamp value is less than or equal to Rs 45 lakhs. If you are eligible for tax deduction under Section 80EEA, then you can’t opt for tax deduction under Section 80EE.
Well, quite apart from this, in the year when the stamp duty expenses were incurred, you can claim the deduction of Rs 1.5 lakhs under Section 80C. It is not applicable if you want to claim it sometime later.
So additional deductions are beneficial too but did you know you can save a lot if you have a joint loan? Suppose the joint loan is taken on a property you are purchasing, then each taxpayer under Section 80C can claim a tax deduction of up to Rs. 1.5 lakhs on the principal and up to Rs. 2 lakhs on the interest amount paid towards the loan.
Suppose you are a first-time home buyer. You get a tax deduction of up to Rs 5 lakhs under Section 80EE, with the condition that the loan must not be worth more than Rs 50 lakhs and the loan amount must not exceed Rs 30 lakhs.
That’s like a lot of tax savings!
2. Education Loan
If you have been paying for your child’s higher education loan or you have taken an education loan, you can save on that investment as well.
But it is only applicable for higher education, meaning anything that follows after you complete a higher secondary examination, either in India or abroad, which is a full-time course.
It doesn’t matter if you have taken it or if you have taken it for your spouse or children; it must satisfy the above-said criteria to be able to avail of it. You must also consider that the loan you have taken is from a reputable financial institution, such as an NBFC, bank, or charitable organization, for that matter.
Up until 8 years from the day you take this loan, you can opt for tax-free interest because you later get to avail of tax deductions under Section 80E.
It is indeed a great deal!
3. Electric Vehicle Loan
If you took a vehicle loan to purchase an electric car from April 1st, 2019 to March 31st, 2023, you can avail of a tax deduction of Rs 1.5 lakhs on the interest paid for this loan if it was taken from NBFC or a financial institution under Section 80EEB.
It is only applicable if it was taken during the specific year. The point to note here is that if it is a purchase for personal use, you can avail of tax up to Rs 1.5 lakhs but if it is for business use and the interest paid exceeds Rs 1.5 lakhs, then the additional amount can be claimed as a business expense to save tax on it.
Only electric vehicles have your back regarding vehicle loans, not any other vehicles.
How are Bonds Taxed?
Government Investments with Returns & Tax Saving Benefits
If you are looking for good returns and also for a tax-saving benefit backed by the government, there are investments in government schemes that can serve what you are thinking. Better than keeping it in your savings account while also saving some money. Worth it, right?
1. National Pension Scheme
Also known by the name NPS, it is popular among people in the office. You don’t need to think of a retirement plan only after 30; you can start early as well. NPS has tier 1 and tier 2 accounts.
The tax benefit is available only in the Tier 1 account, and it is managed by the fund manager, just like in mutual funds with asset allocation in equity, bills, government bonds, and debentures. The return will depend on the asset allocation and these returns and the principal are locked until you retire.
However, you can still partially withdraw before maturity only after 3 years and for specific purposes alone. If you hold until maturity, which is 60 years, you can withdraw 60% of the corpus, and 40% of the corpus will be used to purchase an annuity, which will give you a pension after you retire.
Why is it so popular? It is an exempt-exempt-exempt scheme where you are highly beneficial. Both partial and on-maturity withdrawals, as well as the 40% corpus annuity amount, are also exempt from taxes.
Besides this, if you are an employee investing in this scheme under Section 80C, you get a tax deduction of up to Rs 1.5 lakhs and also an additional tax benefit under Section 80CCD(1B) of Rs 50,000. If your employer contributes to you in this scheme, 10% of both the basic and dearness allowances combined will attract deductions under Section 80CCD(2) on top of both deductions mentioned previously.
The only thing that is taxable is the interest from the annuity pension, which is taxed as per your tax slab.
2. Public Provident Fund
Just like your FD, this is another safe investment option backed by the government but locked in for 15 years and only allows a minimum investment of Rs 500 and a maximum investment of Rs 1.5 lakh per financial year.
Holding a status of EEE, under Section 80C, you get a tax deduction of Rs 1.5 lakh on the principal invested in the PPF. Secondly, the interest earned via this investment is tax-free, and on maturity, the corpus received in your account is also tax-free.
While you landed here to learn about the tax, you are saving in three ways. But when it’s about the investment, you get to earn an interest rate of 7.1%, which is the current rate, which usually gets revised quarterly and is compounded annually.
Regarding the withdrawal, you could do so in the 7th year. To keep the account active, you should invest at least a minimum of Rs 500 every year.
3. Senior Citizen Saving Schemes
It’s a post-savings scheme for senior citizens in India that can be opened in a bank or the post office. It is for senior citizens who are typically over the age of 60. Like an FD, you get a fixed interest rate of 8.2% guaranteed as it is backed by the government with a minimum investment of Rs 1,000 and a maximum of Rs 30 lakhs.
This has a tenure of 5 years and allows the individual to withdraw prematurely but with a charge of 1.5% or 1% depending on the time of withdrawal after opening the account. So having said that, you get to receive the returns every quarter and have a tax benefit where you get a tax deduction of up to Rs 1.5 lakh under Section 80C. If the interest received is above Rs 50,000 per annum, the tax will be deducted at the source.
4. Sukanya Samriddhi Yojana
A scheme for the girl child’s prosperity, which is again a government-backed scheme with guaranteed returns on the investment with a minimum cap of Rs 250 per year and a maximum of Rs 1.5 lakh per year.
It is mandatory to invest a minimum of Rs 250 every year or otherwise a penalty of Rs 50 will be incurred each year while keeping the account open.
Since this payment is made for the girl child in the house, the guardian or parent can contribute the amount in this investment until 15 years after the account opening, after which even if it isn’t contributed until 21 years, it will earn interest.
The maturity of the account will be dependent on either of the two things, one of which is 21 years or the other is marriage after 18 years of age, whichever is lower. After 18 years, this account must be opened under the child’s name.
So any excess amount invested beyond Rs 1.5 lakhs per year will not attract any interest and it can be withdrawn anytime. After 18 years, 50% of the amount is withdrawable for either education or marriage expenses. One can even prematurely close the account for a valid reason that is acceptable as per the scheme.
It attracts an interest rate of 8.2% compounded every year, which is guaranteed. The interesting point about the tax is that under Section 80C, you can claim a tax deduction of Rs 1.5 lakh. The interest earned is tax-free, along with the amount withdrawn after maturity.
While this also attracts the EEE status, this is applicable only if the child is from India.
Equity Investments with Returns & Tax Saving Benefits
1. ELSS (Equity Linked Savings Scheme)
There is no cap on how much you earn; it will depend on the asset allocation by your fund houses, where 60% of the allocation is in equity or equity-linked investments, with a contribution in fixed-income securities as well.
With a minimum cap defined depending on the fund house and no cap on the maximum investment, it’s all on you. So what’s the tax benefit here? The only mutual fund option offering a tax rebate of Rs 1.5 lakh under Section 80C.
All the while, the returns are partially taxed.
2. Other Tax Reliefs in Equity/Stock
If you pay the STT (security transaction tax) on any equity investment, which is generally 0.1%, then the short-term capital gain (STCG) will be 15% for all the investors, regardless of the tax slab to which they belong. Otherwise, if it is an off-market transaction, it’ll be applicable as per the applicable tax slab.
Now what about the long-term capital gain? For the STT, it’ll be taxed at 10% if the gains made per year are above 1 lakh, and if only 1 lakh, it is exempt from tax. If it is an off-market transaction, then the LTCG will be 20%.
Why is Investing in Fixed Income Important?
Fixed-Income Investments with Returns & Tax-Saving Benefits
Fixed-income securities, being the alternative to fixed deposits, of course, offer higher interest rates comparatively but when it comes to leveraging tax benefits from specific bonds that save tax, there are few whose interest rates are lower compared to the usual bonds, making them similar to the returns equivalent to bank fixed deposits.
1. Tax-Free Bonds
The norm is that when you invest in a bond, you receive both principal and interest, unlike equities, where the returns and capital are both at high risk. In tax-free bonds, you can receive fixed interest anywhere from 5.5% to 7.5%, and the interest you receive is tax-free as per the Income Tax Act under Section 10.
The maximum investment allowed is up to Rs 5 lakhs per year but it is locked in for anywhere between 10 and 20 years, depending on the tenure pre-determined by the issuer.
Tax-free bonds such as NHAI and IRFC are some examples of such bonds. Note that these are organiations offering bonds that the government backs.
2. Tax Saving Bonds
Here, it is the opposite of tax-free bonds, where it makes the initial capital invested tax-free, which is as per the Income Tax Act under Section 80CCF, and with that, you can claim a tax deduction of up to Rs 20,000 per year.
The interest rate offered here is either a floating rate or fixed interest, which is offered by the government and may or may not have any lock-in period associated with it. It can be redeemed after 5 to 7 years.
This leaves us to conclude that interest is taxable as per the tax slab and attracts capital gains as well on redemption. The RBI tax-saving bonds currently yield 7.75%, with a minimum investment of Rs 1,000 and no cap on the maximum investment.
3. Capital Gain Bonds
When you have made an investment in an immovable property, such as a building, land, or both, and you made a profit after selling it, holding the property for more than 24 months or more is considered a long-term capital gain. Generally, these gains are taxed as long-term capital gains. But if you want to save tax on these gains, the investor can make an investment in the 54EC bonds, otherwise called Capital Gain Bonds.
Under Section 54EC of the Income Tax Act, the investor can exempt tax on the capital gains made by selling an immovable property entirely but with a cap on a maximum investment of not more than Rs 50 lakhs. This investment in the bond should be made within 6 months of the sale, which is the clause applicable here to avail of such a tax exemption.
These bonds are usually issued by the government or government-backed entities for a lock-in period of 5 years at an interest rate of 5% to 6%. The tax exemption on the capital gain is only applicable if you hold it until maturity.
The interest received from the 54EC bonds is taxable, which must be presented during tax filing time as TDS is not deducted.
4. Tax-Saving Fixed Deposit
The tax-saving deposit is just like any other fixed deposit, with interest ranging from 5.50% to 7.75% on the investment made. The minimum investment depends on the bank, whereas the maximum investment will have no cap.\
The tax-saving benefit is that under Section 80C, you receive a tax deduction of up to Rs 1.5 lakhs, whereas the interest income is taxable as per the income tax slab. The TDS will be deducted where an individual is eligible to do so if the interest received is more than Rs 40,000 in the year. Senior citizens get a deduction of Rs. 1,00,000 under Section 80TTB.
A senior citizen can submit Form 15G to the bank to avoid TDS. These FDs come with a lock-in period of 5 years, until which you don’t get to withdraw and the returns are compounded, which will be redeemed at maturity.
5. Sovereign Gold Bond
An alternative investment compared to having physical gold earns an interest rate of 2.5% on the investment you make in multiples of grams, which will be linked to the price of the gold.
The investment will be locked in for 8 years and you can prematurely withdraw it only after 5 years but if done, the capital gain tax exemption benefit will be lost. So, if you ask, what is the tax benefit here?
SGB, also known as a sovereign gold bond, if held until maturity, can exempt the capital gains tax that it would otherwise incur. Having said that, there is no TDS but the interest earned is taxed as per the income tax slab that you belong to. But if you want to enjoy the indexation benefit, you need to hold it for 3 years, before which it is not applicable.
If you decide to hold physical gold, you might have to pay a tax of 28%, The gold ETF will attract a long-term capital gain tax, whereas the SGB wouldn’t attract any of these except for tax on interest income.
The government has currently paused fresh issuances of Sovereign Gold Bonds, although previously issued bonds remain valid until maturity.
What is a Sovereign Gold Bond?
Other Tax-Saving Opportunities
Now something that doesn’t fit in but still helps you save tax is::
- If you have done charity, under Section 80G, you can claim a deduction.
- If your company doesn’t have an HRA component, under Section 80GG, you can take the rent deduction, which is applicable only if you pay house rent and not otherwise.
- Your savings account makes interest money as well and under Section 80TTA, you can claim up to Rs 10,000 for the tax paid on interest.
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The Wrap
We know you want to save tax, especially when it takes the majority of the money you earn. It’s something that runs through your head every time this month of the year arrives. In Budget 2023, after the introduction of the new regime, none of the tax deductions will be applicable unless you opt for the old tax regime. As you can still opt for it, these are all the options you have for saving your tax.
But if you are wondering whether the old tax regime or the new tax regime is beneficial, let’s get into it in the next blog. Stay tuned!
What is the Difference Between Corporate and Government Bonds?
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
