Income Tax is the tax charged by the Government on the income earned by a person during a financial year. The Income Tax Act, 1961 governs the different types of income and the tax charged on it. However, there are different schemes which are income tax saving schemes. These schemes provide some form of deduction that reduces the income on which tax is charged.
When it comes to tax saving schemes, there are three types of schemes:
The three stages are investment stage, accrual stage and withdrawal stage. There are some tax saving schemes which provide a deduction for investments and allow free maturity but tax the income. Schemes like the NPS tax the final pension received under the scheme.
However there are a few schemes that provide tax free income at each stage. Investing in these schemes saves tax and provides for exempt or tax free income. Depending on the tax slab in which you fall, investing in these schemes can provide a higher return to you. For example, if the return is 7% and you fall in the 30% tax slab, then the actual return is 10% before tax which is superior to other modes.
Here are some tax saving schemes
This is one of the most popular small savings schemes. Investment under this scheme gets a deduction under Section 80C of the Income Tax Act up to Rs. 1,50,000. This scheme has a lock in period of 15 years after which it can be renewed in blocks for 5 years at a time. The rate of interest depends on the rate notified by the Government of India. Over a long period of time, PPF helps compound interest and grow your capital.
Investment in the Employee Provident Fund gets a deduction under Section 80C of the Income Tax Act. There are two types of contribution under EPF, voluntary contributions and contributions by employer. The interest under this scheme is tax free if the employee works for a continuous period of 5 years. This is also a way to build a corpus for retirement.
These are different bonds issued by National Highways Association of India (NHAI), Rural Electrification Corporation (REC) etc. The interest earned on these bonds is tax free and there is no tax on withdrawal or exit from the scheme. These bonds are notified by the Government i.e not all corporate bonds are tax free bonds. However, tax free bonds may not help save tax at the investment stage i.e no notified tax deduction is available on them.
The Sukanya Samriddhi Yojana is a scheme introduced by the Government of India to aid financial independence of the girl child. Contributions in this scheme have to be made for 14 years after account opening and the account matures after 21 years. The interest is tax free income for the girl child. The funds from this account can only be withdrawn by the girl child for her needs which helps financially secure the girl child for the future.
Any investment made in life insurance gets a deduction under Section 80C of the Income Tax Act. The section does not distinguish between endowment plans, Unit Linked Insurance Plan or term insurance plans. This gives the policyholder the freedom to pick the insurance plan of his choice. Any accruals, bonus, increase, capital gains on the life insurance policy are not charged to tax while the policy is going on. Any sum received from the insurance policy on death of the policyholder, or on maturity of the policy is exempt from tax. This helps provide financial backing and security to the family. This is why investing in a life insurance that provides good bonus or money back can help boost income and financial stability since any sums received from the insurance policy are not chargeable to tax.
However, if the insurance policy is surrendered, then depending on when the policy is surrendered, the deduction availed may have to be reversed. This is why it is better to be careful while selecting your life insurance policy.
Investing in Equity Linked Savings Schemes (ELSS) or tax saving mutual funds gets a deduction under Section 80C. However, investing in ELSS has a lock in period of 3 years. Any accretion due to growth in the NAV is exempt from tax up to Rs. 1,00,000 in a financial year. If you have opted for a dividend plan where you get dividends, then the dividend income is also tax free.
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