A wise person once said that there is nothing certain except death and taxes in this world. However, tax planning helps dilute the inevitability of taxes. We will discuss the various tax saving options available in India for individuals and HUF taxpayers.
Tax savings proceeds under Section 80C
Section 80C of the Income Tax Act 1961 includes various investments and expenses against which you can claim deductions – up to the limit of Rs.1.5 lakh in a financial year.
- 5-year bank fixed deposit
- National pension scheme
- Public provident fund
- Sukanya Samriddhi Yojana
- Savings plan for seniors
- National Savings Certificate
- Main component of the home loan
- Tuition fees (up to 2 children)
- Unit-linked insurance plan
- ELSS funds
Tax savings productsOther than under Article 80 C
In addition to Section 80C deductions, there are various Section 80 deductions you can use to save on income tax:
- Medical insurance premium can be claimed as a deduction under Section 80D up to Rs.50,000/- (Rs.25,000/- for self, spouse and children and Rs.25,000/- for dependent parents under the age of 60).
- Interest paid on a home loan can be claimed as a deduction under Section 24 up to Rs.2 lakh. Additionally, under Section 80EE, you can claim a deduction of up to Rs 50,000/- on home loan interest, which exceeds the Section 24 limit.
- Interest paid on an education loan qualifies for a deduction under Section 80E.
- In addition, a deduction under Section 80G is available for any donation to charitable or notified institutions or funds.
How does NPS differ from the products mentioned above?
The National Pension Scheme or NPS was introduced with effect from January 2004 to provide pension benefits to all Indian citizens including those working in the unorganized sectors. The NPS is implemented and regulated by the Pension Funds Regulation and Development Authority (PFRDA). The NPS aims to generate income for seniors after retirement so that they can support themselves well during their retirement years. Any Indian national between the ages of 18 and 65 can join. The scheme is classified into two levels:
- Tier-I account: In this account, savings are deposited and invested according to the option of the investor, provided that no withdrawals are authorized.
- Tier II Account: This is a voluntary account that is only permitted when there is an active Tier I account in the investor’s name. Withdrawals are permitted from this account based on the needs of the investor.
NPS tax benefits are not limited to Section 80C. Under Section 80CCD(1B), an additional tax benefit is granted only to NPS investors. In this section, you can claim tax deductions for additional investments in NPS up to Rs 50,000/-. This deduction is in addition to the deduction that is available under Section 80C.
This means you can claim tax deduction up to Rs.2 lakh just by investing in NPS – Rs 1.5 lakh under Section 80C and another Rs.50,000/- under Section 80CCD(1B) . So, if the 30% tax bracket is applicable, you can save up to Rs 62,400 in taxes.
In addition, under Section 80CCD(2), the tax benefit may be derived from contributions paid by the employer. While government employees can claim up to 14% of their salary as a tax deduction under this article, private sector employees can claim up to 10% of their salary as a tax deduction. However, this article only applies to an employee and not to a self-employed worker.
- India’s pension assets under management (AUM) are estimated to have reached Rs.7.5 lakh crore by the end of March 2022. It is PFRDA’s effort to reach an AUM of Rs.30lakh crore d 2030.
- PFRDA has come up with a Guaranteed Return Scheme, viz., Minimum Assured Return Scheme (MARS), which will provide investors with an option for their investments.
- About the proposal:Have a separate plan that can offer a guaranteed minimum rate of return to NPS subscribers, especially those who are risk averse. Under MARS, any shortfall must be made up by the sponsor and the excess will be credited to the investor’s account.
- Options that will be offered:
- Fixed Guarantee Option:The guaranteed return is fixed throughout the accumulation phase under this option.
- Floating guarantee option: Under this option, the guaranteed rate of return is not fixed with the savings phase. The floating guarantee depends on market movements from the 1-year interest rate until retirement.
- Contribution limit:The PFRDA may prescribe minimum and maximum monetary limits on individual contributions. The guaranteed minimum return will remain an attraction for investors.
- Blocking period:A lock-in period may apply to each contribution made under this plan. This blocking period will be applied according to the period that has elapsed since the contribution was paid. However, there is no guaranteed rate of return applied on the investment after the lock-in period.
The above developments are aimed at investors who are risk averse and prefer a steady return. As seen in various market-linked investments, staying invested longer provides a high probability of benefiting from the power of compounding.