Understanding tax credits to maximising your savings


Ever had to postpone getting a new phone or doing home-decor simply because the market rates are not pocket-friendly? Inflated prices often hold us back from buying things we normally would, wondering if the rates would ever come down. For the last nine months, inflation in India has remained above the Reserve Bank of India’s (RBI) target of 6%. This not only makes everything expensive, but also limits our purchasing power. Most of us have enough to keep up with the inflation but not enough to beat it. To outrun the rate of inflation, we need more funds at our disposal and the practical way to do that is by increasing our savings. One way to achieve that is by saving big on TAXES!

At the end of every financial year, we rush to our CA with the hope that our pile of bills saves us from all the taxes in the world. Reliant on a professional to take care of our taxes, we often assume there’s nothing more than collecting invoices that we can do. And it is not us to blame but the common lack of awareness.

As we grow up, taxes become a part of our lives that cannot be escaped. And with the right choice of investments, you can save huge amounts on taxes every year. Knowledge of tax planning gives you control over your finances and helps you plan your yearly finances wisely. And in the midst of a pool of information, we’re here to get you from beginner to know-it-all in the simplest way possible.

To begin with, how does saving on taxes work?

As per the Income Tax Act 1961, your income from all sources attract taxes that are paid to the government at the end of every financial year. Section 80C, 80D, and 80G of the Income Tax Act describe the ways of saving on taxes. These ways list the various investments, insurance, loans, etc. that allow a certain percentage of tax exemption.

Here are some of the popular ways that help you save up to 1.5 lakh a year:

  • Equity Linked Savings Scheme (ELSS)

ELSS is the only type of mutual funds that qualifies for tax deduction under Section 80(C) Income Tax Act. It comes with the shortest lock-in period of three years and generates the highest returns among all the schemes for tax saving. These investments are primarily equity-based which garner higher returns, making it one of the most profitable tax-saving options in the long run.

  • Tax-saving FD

Fixed deposits are believed to be one of the safest tax saving options. These have a minimum lock-in period of 5 years, before which you cannot withdraw your money. In terms of risk, it is safer than equity investments and banks decide the interest rates. Tax-saving FDs like Karnataka Bank’s Tax Planner Fixed Deposit are popular for their dual benefits of saving tax and earning high returns.

  • Term Life Insurance

Insurance allows tax deductions on premium paid for self, spouse, dependents, and any other member of Hindu Undivided Family or HUF (Under Hindu Law, HUF is a separate legal entity consisting of all persons descended from a common ancestor). Moreover, income on the policy maturity is also tax free as long as the premium is not more than 10% of the sum assured. You can claim 20% tax deduction on the sum assured if the policy is issued on or before March 31, 2012. If the policy is taken after April 01, 2012, 10% of the sum assured is eligible for tax deduction.

  • Health Insurance

Tax deduction of Rs. 25,000 is allowed on health insurance premium paid for self, spouse, and dependent children. On purchasing health insurance for parents, you can claim an additional deduction of Rs. 25,000 if they are under 60 years of age and Rs. 50,000 if they are over 60.

  • Public Provident Fund (PPF)

PPF is a long-term investment option that allows you to avail tax benefits. Its lock-in period is 15 years and it can be opened with as little as Rs. 100. In a financial year, you can invest a minimum of Rs. 500 and maximum of Rs. 1.5 lakh in PPF. On exceeding the maximum amount, no interest will be earned on the excess amount.

  • National Pension Scheme (NPS)

NPS enables you to build a retirement corpus and avail tax deduction of up to 1.5 lakh. Your money is invested in equity and debt assets and the total amount on maturity depends on how well these assets perform. It has a lock-in period until you turn 60 which is when you can withdraw 60% of the amount, while the rest 40% is used for annuity to receive monthly pension.

  • National Savings Certificate (NSC)

NSC is a fixed income investment scheme that earns handsome returns. It involves low risk like PPF and you can begin by investing as low as Rs. 1,000. The lock-in period is of five years with guaranteed interest of 7% p.a..

Apart from these, there are several other tax-saving options like home loan and education loan that could save you lakhs on taxes every year. Before picking any instrument, do consider the risk level, returns, lock-in period, etc. and choose what fits your needs best. It’s time to put your knowledge to use and go big on saving with tax benefits!