Different Ways Of Saving Income Tax in India

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How to save income tax in India?? here is a small article which answers it. I don’t think anyone is happy about the taxation system in India, we pay huge income tax to government for no reasons. Well, lets not discuss of the system, else it will take a full day 🙂 Basically I wanted to put down a simple article that would help someone in saving a little tax amount being paid by them. The thumb-rule is ‘PLAN your investments’, don’t hurry and invest in some ‘Good for nothing’ investment plans during fiscal year-end. As we all know, Indian Government has listed down few instruments, into which, if you invest, your money will be tax free. So here is a small list of such instruments where you can invest.

  1. Provident Fund: This is something that Government has made mandatory and most probably, you employer will deduct the PF amount from your salary and this amount is tax-free. The PF amount usually is kept as a retirement fund.
  2. Public Provident Fund (PPF): Another instrument, where in you can invest right from Rs.500 per annum and there is no upper limit for this. But you can claim for a maximum of Rs.100000 per year from PPF. The problem with PPF is, your money will be locked for a period of 15 years. You can invest monthly or annually into PPF. The interest rate you get is somewhat about 9% and your returns are guaranteed and also the returns is tax free. You can create a PPF account in any of the Post offices in India or in any of the State Bank of India branch. Post office do not provide any online facilities though.
  3. Tax Saver Fixed Deposit: A safe way of investing is by creating a tax saver fixed deposit in any of the scheduled banks listed by the Indian Government. Your money will be locked for a period of 5 years here. The ROI depends from bank to bank, but on an average the ROI will be about 8.5-9%. Returns are guaranteed but the interest you get is taxable.
  4. Life Insurance Premiums: There are lot of life insurance schemes available in market, which are covered under the 80C section. Some schemes like Insurance+Investments are also covered under this instrument. The returns may not be or may be guaranteed based on the scheme you invest. All the insurance premiums you pay are regulated by IRDA (Govt. Institution for regulating Insurance companies in India) So you can safely invest in these, simultaneously get life cover.
  5. ULIP: You can invest in unit linked plans, which are basically market linked, so the risk is high and your returns are not guaranteed, it depends on current market and your scheme performance. But yes the amount you invest here is tax free. Also if the market is doing good, you can get better returns than any FD or PPF.The returns are tax free.
  6. Mutual Funds (ELSS): This segment of mutual funds come under the 80C section and your investments in ELSS is tax free. You can go for systematic investment plans (SIP) which start from as low as Rs.500 per month. The returns is not guaranteed but when the market is doing good, the ROI you get for your investment is almost double as that of FD and PPF. As this scheme is market linked, there is always a risk associated with this scheme. The returns are tax free though. Most of the time the lock-in period for ELSS is 3 years.
  7. National Saving Certificate (NSC): Another safe way of investing and getting tax exemption on your investments. You can get NSC from any post offices or banks. The ROI is something around 8.5-8.75%. The lock-in period for your money is 6 years. The interest you get is taxable. NSCs start from as low as Rs.100 and in multiples of 100s. There is no upper limit for NCSs upto Rs.100000.
  8. Pension Plans: There are lot of pension plans available in market, so you can invest in any of these plans so that you can retire safe. But make sure before you invest that, there is tax exemption on your investment. Also some schemes like monthly income plans are available in market, which gives you a small part of your investment back monthly along with life cover etc.
  9. Children Tution Fee: Well, this is not a short term investment though, but yes you get tax exemption on the tution fee you pay for your child’s education.

The maximum amount you can invest altogether in a financial year is Rs.100000 (1 lac Rupees). No matter how much income you have, this is the maximum amount you can invest in a year (Bad isn’t it?, Can’t avoid though 😦 )

So you can invest something like, Rs.50000 into Tax saver FD, Rs.25000 in insurance premiums, Rs.20000 into ELSS and Rs.5000 into NSC. This is just an example, you invest however you like below this 1lac slab.

Until last year, i.e 2011, Infrastructure bonds were also covered under this section, where in, you could have invested upto Rs.20000 in Infra bonds above the 1 lac investment slab, but in the recent budget, it has been removed from the list.

Apart from these you can also save tax on the interest you are paying for your Education loan or Home loan. But this is covered under different section by Government.

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