For a country’s government to function seamlessly, it is important for it to collect taxes from its people. These taxes are used to provide them with roads, schools, hospitals, and other such amenities. A good citizen does not consider income taxes to be a burden but rather an obligation as a responsible citizen. Therefore, paying your taxes is your fundamental duty.
At the end of every financial year, a tax payer has to fulfil this obligation by filing for their taxes and pay the due amount. However, what most people don’t know is that the government has several tax saving options that can help you reduce your tax liability and encourage you to invest in financial instruments that will grow your wealth over time.
As a taxpayer, you should only pay what you rightfully owe to the government. That is why it is critical for you to know what you need to pay and how you can save taxes on your income. To understand this better, let us look at the benefits of tax saving.
Helps You Build A Financial Portfolio
When you build a portfolio at a young age, it gives you a head-start for your future and also makes your financial portfolio stronger as you age. At the same time, you can choose a longer duration for your investments that will eventually yield better returns.
For example, you can avail much higher term insurance tax benefits when you invest at an early age when you do not have any dependents or any kind of debt. Longer tenures mean lower premiums and a larger sum assured, plus the added assurance that your family will always be financially safe and sound.
Helps You Cultivate The Habit Of Saving Early On In Life
The most prominent benefit of tax saving investments is that it encourages and enables savings at an early stage of your career. You will learn to set aside an amount every month that will save you taxes and also build your financial portfolio in the long run.
Most tax saving investments don’t just help you save taxes but also enable you to build a corpus of funds that lets you meet your long-term and short-term goals. Since most of these instruments are government-backed, they are considered safe investment options.
Avail Tax Deductions
When you invest in tax saving financial products, you become eligible for tax deductions applicable as per the Income Tax Act.
Best Tax Saving Investments To Choose From
If you hurriedly look for investment options at the end of every financial year just to save some taxes, then you are not alone. But it is important to understand that investments made solely for the purpose of saving taxes are cannot possibly be sound financial investment decisions.
While they are an ideal method to reduce your tax liability, it is also important to educate yourself about their pros and cons before adding them to your portfolio. Here are some of the instruments that are considered ideal for tax saving purposes for salaried professionals.
Life Insurance Policies
Life insurance is a crucial investment decision that will not only reduce your tax liability but also safeguard your family’s financial interests in case something happens to you.
At the same time, you are eligible to save up to Rs. 1.5L in tax rebates u/s 80C of the Income Tax Act. Additionally, the maturity benefit is exempted from taxes, subject to prevailing laws.
Fixed deposits are considered relatively safe investment options. The investments made in FDs are eligible for up to Rs. 1.5L u/s 80C of the Income Tax Act. Besides, it is very easy to open and operate an FD account in any bank.
Equity-Linked Savings Scheme (ELSS)
Also known as diversified equity mutual funds, all the investments made in ELSS are eligible for a tax rebate up to Rs. 1.5L every financial year u/s 80C of the Income Tax Act.
Public Provident Fund (PPF)
Adding PPF to your financial portfolio is an intelligent decision for not just tax saving purposes but also wealth creation. All the deposits made in the PPF account are eligible for tax rebated u/s 80C. The interest that you accumulate over the period of investment is also tax-free at the time of withdrawal.
National Savings Certificate (NSC)
National Savings Certificates come with a lock-in period of 5 years and can be easily purchased at specific post offices. You can claim up to Rs. 1.5L tax rebate in a financial year as per section 80C of the income tax act.
Employee’s Provident Fund (EPF)
Employees should consider investing a portion of their salary in EPF accounts. It is a great way to build a corpus for your retirement. Additionally, contributions made towards EPF are eligible for tax benefits u/s 80C. The interest earned on your contribution and that of your employer is tax-free.
National Pension System (NPS)
This tax saving scheme was introduced by the government for individuals who work in the unorganized section so that they can receive a pension upon their retirement. Under this, investments up to Rs. 1.5L are eligible for tax deductions, and you can also avail of additional Rs. 50,000 rebate u/s 80CCD (1B).
Financial planning is an essential part of your tax-saving initiative. These days, there are many insurance providers that offer online tools to compare policies and benefits before making a purchase. Make sure you leverage these tools to choose the suitable tax saving investments for your portfolio!