The adage of ‘make hay while the sun shines’ especially holds for tax planning. According to financial experts, the sooner you start managing your income and tax liabilities, the better are your chances of maximising your savings and improving your finances. Therefore, the best time to start with your tax saving investments is at the beginning of the fiscal year.
Instead of procrastinating till the last quarter, if you plan your investment at the start of the year, you can reap not only immediate benefits but also set a firm foot towards accomplishing your long-term financial goals. In other words, you can leverage tax-saving instruments to build wealth as well as save tax. Here’s how.
Unit Linked Insurance Plan
Unit-Linked Insurance Plan or ULIP is a hybrid product, which offers you a combination of life cover protection and saving. Essentially, ULIPs channel a portion of your savings into various money market-linked instruments, with the asset allocation varying between equity and debt funds. On the other hand, the remaining portion is utilised into providing life insurance benefits to you.
Moreover, the tax-savings under ULIPs work in two ways. The invested premium earns you deductions under Section 80C of the Income Tax Act 1961, while the maturity benefits from the plan are tax-free under Section 10(10D) of the Act.
Therefore, ULIPs are an ideal tax-saving investment tool for young investors who are looking for options to maximise their savings.
Equity-Linked Savings Schemes (ELSS)
Equity-linked savings schemes or ELSS, are essentially diversified equity mutual funds that serve two vital purposes:
- The premium invested fetches you tax deductions up to Rs. 5 lakhs under Section 80C of the Income Tax Act, 1961.
- The invested amount has a lock-in period of 3 years, which helps your investments to grow through market-linked returns.
Further, you have to option to go for either dividend or growth option in ELSS. While the dividend option is better suited for individuals who’re looking for a regular source of income, the growth option is appropriate for long-term profits. Both, however, help avail tax-effective returns.
Public Provident Fund
For many years, the Public Provident Fund or PPF Scheme has been one of the favourite investment tools for salaried professionals, and it continues to do so. After all, both the principal amount invested up to Rs 1.5 lakhs and the interest earned is tax-free.
Also, the rate of interest earned on PPF is currently 8% per annum (subject to change every trimester). With PPF, therefore, you can substantially reduce your tax liability in a financial year.
That said, PPF is a 15-year investment scheme, exceeding which, you can indefinitely extend the plan in a block of 5 years. In other words, PPF can help you earn tax-free benefits to suffice your long-term goals as well.
Term Insurance
Term insurance plans are essentially pure insurance products that allow you to safeguard your family’s financial future with a significant financial cover, in case of your untimely demise.
Overall, popular term insurance plans from reputable insurers such as Future Generali offer you a number of benefits to help take care of your liabilities and responsibilities towards your family including:
- A lump sum amount in the event of your sudden death to ensure your family’s financial security.
- A supplementary income to counter any loss of income due to an accidental disability or illness.
- Tax deductions up to Rs. 1.5 lakhs on the premium amount invested under Section 80C of the Income Tax Act 1961.
- Death benefit received by your nominee is free from taxation under Section 10(10D) of the Act.
Conclusion
Whether you are a seasoned taxpayer or a first-timer, you can easily reduce your tax liability with efficiently planning your taxes. There are a variety of tax-saving investments, which are designed to help you avail comprehensive tax benefits while making sure that your finances continue to grow in value with significant returns on investments.
All you need to do is to choose an instrument after careful deliberation and invest a position of your income to claim the tax benefits. With time, you can diversify your investment portfolio to include more than one investment and insurance tools to maximise your tax savings in a financial year.