Year end is approaching and people are on the look-out to work on tax savings. There is nothing uncommon or new in this. Past year trends indicate that individuals get active to save taxes during the financial year end. That is the time they look out for a tax saving plan to help them strategise their investments. But those who fail to understand the relevance and benefit of tax saving strategies end-up wasting a lot of money unnecessarily.
Manish asked his financial advisor, Prateek, to suggest some tax savings plans that could help him. Manish had to face tax deductions of Rs.2 lakhs every year. Considering his scenario, Prateek told him to buy a ULIP Plan and also invest the rest in a Strategic Investment Plan (SIP).
Manish then purchased a ULIP plan premium for which was Rs.1.5 lakhs. On the other hand, he made an annual investment of Rs.50,000/- in SIP. Manish continued with these two investments for over 20 years. The investments were made keeping in mind that if anything would happen to Manish, at least his family will be secured.
If you are also interested in buying tax saving plans, you can read further. Also understand the relevance of tax implications that will help you buy plans.
5 Ways to Save Income Tax 2021.
Here are the popular and commonly practiced 5 ways to save income tax in 2021:
Buy Pension Plans:
If you manage to maintain a good lifestyle in the present time and wish to sustain it after retirement, it is wise you must buy pension plans. Saving for retirement is never enough. Pension plans are just an instrument to ensure protection for your old age. You also get life cover in the time when you pay a premium. This indicates that if anything happens to you during the policy term, the nominee gets the sum assured.
Buy a pension plan after considering your expenses, premium paying capacity, plan benefits, policy term, and premium paying term. The premium you pay will fetch you tax exemption under section 80 C of Income Tax Act, 1961.
Get a Health Insurance Policy:
Health insurance policy in today’s time is not just a tax saving tool but also a basic requisite. Wise are those who have health insurance cover for themselves as well as the family. Lifestyle related as well as communicable diseases that spread fast have off-lately damaged the health and the economical condition of the families.
It is important to understand that any deterioration of health is not always pre-informed. You need to prepare and save funds to bear the medical expenses that are sudden and uncalled for. Health insurance policy premium can be claimed for tax-exemption under Section 80 D of Income Tax Act, 1961. Individuals can claim a maximum deduction of Rs.25,000 for insurance premium for self, spouse, and dependent children.
Invest in Life Insurance Policy:
Purchasing insurance coverage for yourself and your family has numerous advantages, one of which is tax savings. There are deductions on the premiums and payouts of life or term insurance plans under section 80C of the Income Tax Act of 1961, so you could minimise the amount you invest in insurance.
Premiums that you pay for life insurance are repaid in a huge lump sum or in instalments ( as specified at the beginning of the policy). The amount is payable in the event of the insured person’s death, and is tax-free if the amount is less than Rs 1.5 lacs. Some of the policies that you can buy include term plan, ULIP plans, child-plan, and savings plan.
Take Education Loan:
Education loan demands barely die despite any odds. People nowadays can compromise on living but they do not put their children’s education at stake. Education loan companies including banks disbursed Rs.11,000 crore loans in the 12 months till September 2020.
The expense of education is rising every year. Parents and/or students are taking out education loans to pursue higher education and a brighter future.
The good part is that an education loan is a tax-deductible asset that can be exempted under Section 80E of the Internal Revenue Code. If you have taken out an education loan, the interest paid on that loan is tax deductible; however, this benefit is only available to individuals, not HUFs. However, there is no such limit on the amount that can be deducted; under section 80E, the total interest paid can be deducted.
Buy Market-Linked Investment Risks:
If you look for high returns over a long period of time and save tax on the money you invest, you must try the Equity Linked Saving Scheme (ELSS). The scheme comes with a lock-in period of 3 years. These are market-linked investment tools that help you to get good returns but after a long period of investment.
Risk averse investors can put their money in government backed tax-saving scheme NSC. Apart from these two, you can also invest for tax savings in FD, ULIP, and PPF. Under section 80C, you could claim deduction from these different investment options of NSC, ELSS, etc. only if the total amount does not exceed Rs 1.5 lacs per annum.
Apart from the tax saving strategies mentioned above, there are many other ways like the amount of gift you get in marriage. There are two tax schemes to compute your taxable income: old and new. Taxpayers can select between the old and new tax regimes, based on which one minimises their tax liability the most. The taxpayer can choose to pay income tax at a lower rate under the New Tax regime if they are willing to forego certain income tax exemptions and deductions. Otherwise, they can continue to pay taxes at their current rates. By continuing in the previous regime and paying tax at the higher rate, the assesses can get rebates and exemptions.
To avert your financial stress of saving taxes, you must consult a tax consultant. You can also look for some tax saving plans.
Smriti Jain is the owner and senior content publisher at Financesmarti. Financesmarti is a website where she shares a lot of useful stuff for the people and business of India. This includes small business ideas and other banking information, as well. Smriti completed her education in science & technology from Delhi University. Smriti usually has interests in digital marketing now, and she has chosen this career for the full-time opportunity. The primary purpose of starting this blog to provide quality information on the banking industry to the people.