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Tax Saving Investments in India

When you start earning, a part of your income must be paid to the government as tax. It is natural to want to save as much of your hard-earned money as possible. So, whether you are running your own business or employed in the service sector, planning for tax saving, especially tax saving investment is important.

Smart tax planning helps you invest your money in various ways so that your tax outgo is reduced. Being aware of the various tax saving investments is important in this regard.

Read more: Investments to declare to get tax exemption

How much income tax do you need to pay?

To find out how much income tax you need to pay, first calculate your total income. To do this, you will need to add up all your income components like salary, capital gains, interests received, etc.

There are five categories of gross income as per the Income Tax Act, 1961:

  • Income from salary
  • Income from house/property
  • Income from business/profession
  • Income from capital gains
  • Income from other sources

For any tax-saving measure, you must determine your total taxable income.

The following income components are exempted from tax:

  • House rent allowance (HRA)
  • Leave travel allowance (LTA)
  • Transport allowance
  • Medical allowance

Read more: Save tax with tax-exempted allowance

Now, deduct the total tax-exempted components from your total income. The remaining amount is your taxable income.

Once you calculate your taxable income, you will know your applicable tax slab. Accordingly, you can file your income tax papers.

The following tables show the existing income tax slabs as per the age group of taxpayers:

For individuals below 60 years of age

Income Slab

Tax Rate Charged in FY 2019–20

Up to Rs 2,50,000

NIL

Rs 2,50,001 to Rs 5,00,000

5%

Rs 5,00,001 to Rs 10,00,000

20%

More than Rs 10,00,001

30%

For individuals between 60 and 80 years of age

Income Slab

Tax Rate Charged in FY 2019–20

Up to Rs 3,00,000

NIL

Rs 3,00,001 to Rs 5,00,000

5%

Rs 5,00,001 to Rs 10,00,000

20%

More than Rs 10,00,001

30%

For individuals above 80 years of age

Income Slab

Tax Rate Charged in FY 2019–20

Up to Rs 5,00,000

NIL

Rs 5,00,001 to Rs 10,00,000

20%

More than Rs 10,00,001

30%

The income tax rates mentioned above are also applicable to FY 2020–21. But taxpayers in FY 2020–21 can also opt for a new taxation regime. This new regime does not provide for several tax exemptions and deductions—including those mentioned under Sections 80C and 80D—but the tax rates are lower. Moreover, the tax slabs are the same for all age groups.

Annual Income (Rs)

Rate of Tax Charged

Up to Rs 2,50,000

NIL

Rs 2,50,001 to Rs 5,00,000

5%

Rs 5,00,001 to Rs 7,50,000

10%

Rs 7,50,001 to Rs 10,00,000

15%

Rs 10,00,001 to Rs 12,50,000

20%

Rs 12,50,001 to Rs 15,00,000

25%

Above Rs 15,00,000

30%

Regardless of which tax regime you choose, two other charges will apply:

  • Surcharge on income tax: This is levied on taxpayers who earn more than Rs 50 lakh annually. The rates vary according to the payer’s annual income range.
  • 4% health and education cess: This is charged on the total of income tax payable and surcharge.

There are several websites providing online calculators to compute your income tax. You can use any of these online services. Or, you can hire an experienced chartered accountant (CA) to help you with the tax calculations.

Read more: Benefits of filing income tax returns

Tax Saving Investments Under 80C

How much should you invest to save tax? Section 80C of the Income Tax Act has several tax-saving investment options for Indian citizens. Using these options, you can save up to Rs 1.5 lakh per year. Here are some of the most popular tax saving investment options.  

  • Equity Linked Saving Scheme (ELSS)

    An ELSS is one of the most sought-after tax saving investment options under Section 80C. These diversified equity funds invest a big chunk of their corpus in equities and related products.

    ELSS funds have the lowest lock-in period of three years (in comparison to other 80C schemes). In this scheme, every instalment is considered a fresh investment and has to abide by this minimum lock-in period. These types of mutual funds often deliver higher returns than traditional saving options.

    Read more: Taxes on mutual funds

  • National Pension System (NPS)

    The NPS is a Government of India initiative. It provides pensions to people working in unorganised sectors. It also caters to other professionals who do not have pension facilities.

    NPS Is an essential tax saving investment which offers tax benefits related to pension funds are deducted under Section 80C, 80CCC, 80CCD(1), 80CCD(1B), or 80CCD(2).

  • Employees’ Provident Fund (EPF)

    Contributions made towards EPF are considered for tax deductions. An employer deducts the contributory amount from an employee’s salary. Thereby, tax is further reduced. This is a great savings option.

    There is a provision to increase the contribution beyond the statutory amount. This increased amount will also be considered for tax deductions.

  • Public Provident Fund (PPF)

    You can open this Government-backed account at any bank or post office. Every year, you need to deposit a minimum of Rs 500 up to a maximum of Rs 1.5 lakh in your PPF account. It is compulsory to deposit an amount at least once a year. If you fail to do so, your account will be declared dormant.

    PPF accounts have a lock-in period of 15 years. After seven years, partial withdrawals are allowed. PPF contributions are exempted from tax. Also, the total amount you get on maturity is tax-free.

  • Tax-saving Fixed Deposits (FDs)

    Banks also offer tax saving investment in the form of FDs. These are similar to regular FDs but with lock-in periods of five years. However, they do not give high returns as they are not equity-linked. Also, the interest earned is taxable.

    Read more: Right time to start tax planning

  • Sukanya Samriddhi Yojana

    The Government started this scheme to help the girl child in her studies and marriage. Parents can open an account in their daughter’s name by the time she is 10 years old. The account remains active for 21 years or till she gets married after turning 18. When she is 18 years old, parents can withdraw 50% of the saved amount.  

    A person can deposit up to Rs 1.5 lakh per financial year under this scheme. This amount is tax exempted, hence making it a tax saving investment for encouraging the upbringing of the girl child.

  • Unit-Linked Investment Plan (ULIP)

    A ULIP is essentially both an insurance and investment policy. A part of the amount you give towards this plan is invested in the stock market for higher returns.

    You can buy a ULIP in your name or in the name of a member of your immediate family to enjoy tax benefits. To avail rebates under Section 80C, you need to contribute up to Rs 1.5 lakh per year.

  • Tuition Fees

    With the rising cost of education in India, quality teaching for your children has become expensive. The income tax rules have tried to bring some relief in the form of tax deductions for amounts paid as tuition fees. Parents can claim this deduction under Section 80C.

  • Repayment of Home Loan

    Availing a home loan is a smart way to get tax benefits. Both the principal amount and the interest component of the home loan EMI are eligible for deduction. A part of the deduction comes under Section 80C. You can claim the rest under Sections 80EE and 24.

  • Life Insurance Premium

    You can avail various kinds of life insurance premiums for yourself or your family that are eligible for tax exemptions. You can claim a maximum of Rs 1.5 lakh per year towards insurance premium.

    Read more: Investments under 80C