One of the most important questions that come up around the IT returns filing season is about how to save taxes and what are the best investment options. Read on to understand your tax saving investment options.
Tax saving investments 2020-21
The first step to take when you are looking at taxation is to consider tax saving investments under 80C. There are many tax saving options for salaried 2020 21 you can opt for under Section 80C of the Income Tax Act. These options include equity-linked savings schemes (ELSS) also known as tax saving mutual fund and Public Provident Fund (PPF), apart from tax saving FD (fixed deposits), employee provident fund (EPF), the National Pension Scheme (NPS) and National Savings Certificate (NSC).
One of the most widely opted for tax saving options for salaried 2020 21 is ELSS. Equity-linked savings schemes or tax saving mutual funds help you save up to Rs 46,800 annually in taxes and you can claim tax deductions of up to Rs 1.5 lakh. ELSS funds are the only mutual fund schemes that are eligible for tax deductions under Section 80C. However, the interest you may gain upon redemption is considered capital gains. You can get an exemption of up to Rs 1 lakh on capital gains. Exceeding t this limit, returns are liable to taxes at 10 per cent.
The other benefits of ELSS funds include a short lock-in period of three years, among the shortest lock-in periods when compared to other tax saving options. They are also known to offer double the returns that a PPF or an FD offers. What’s more, with a tax saving investment option such as ELSS, you can take the systematic investment plan route and invest a small amount every month. The minimum you can invest in tax saving mutual funds is Rs 500.
The other tax saving option that is popular is the Public Provident Fund or PPF. PPF is a scheme that is backed by the government. If you were to pick a PPF, your deposit is eligible for deduction under 80C. The interest earned is also exempt from taxes. The lock-in period for a PPF is however 15 years. You can extend your investment in a five-year block. The minimum investment is Rs 500; you can invest a sum of up to Rs 1.5 lakh per year.
Apart from ELSS and PPF, the other tax-saving option that is used is a tax saving FD. You can claim a deduction on investments of up to Rs 1.5 lakh in a tax saver fixed deposit. The lock-in period is five years. The tenure for deposit can vary between 5 and 10 years. Senior citizens are offered higher interest rates when they choose a tax saving fixed deposit. You can opt for a tax saving FD that any bank offers, depending on the interest rate. Interest rates may vary from bank to bank.
What is a recurring deposit?
A recurring deposit or RD is also a popular investment option in India. It is low-risk and offers flexible tenure options from six months to ten years. Banks and non-banking financial companies (NBFCs) offer recurring deposit schemes. You can choose a minimum amount to invest every month; interests are typically calculated every quarter. The interest rates however vary from bank to bank and so do the minimum investment amount. There are also recurring deposit schemes for senior citizens that offer a higher rate of interest.
The biggest differences between a fixed deposit and a recurring deposit are as follow:
– The deposit made in a fixed deposit is only once. In a recurring deposit, the deposit is made on a monthly basis.
– While a tax-saving option is available for a fixed deposit, there is no such option under a recurring deposit.
What is a post office RD and is it covered under Sec 80C?
While a regular recurring deposit does not have a tax-saving option, a range of post office savings schemes can also be tax saving investments under Section 80C. If you have a five-year recurring deposit account in a post office, you can claim a deduction of up to Rs 1.5 lakh per annum. However, the interest generated is liable for taxation. Also, interest that is beyond Rs 10,000 would be made liable for deduction as tax-deductible at source at 10 per cent.
Other post office saving schemes under Sec 80 C
Apart from a post office RD, you can also opt for a post office savings account, a post office time deposit account (TD), post office monthly income scheme amount (MIS), senior citizen savings schemes (SCSS), a 15-year PPF, National Savings Certificate (NSC), Kisan Vikas Patra (KVP) and Sukanya Samriddhi Accounts (SSA).
There are also tax saving investments other than 80C you can make. Although the most used deduction options are available under Section 80C, you can make other investments such as unit-linked investment plans or ULIPs. It is among the most widely used investment options that those in the higher tax bracket typically use. However, following Budget 2021, the taxation rules have changed. If the premium on your ULIP investment exceeds Rs 2.5 lakh annually, you can no longer claim tax exemption. Tax exemptions under Section 10 (10D) for maturity proceeds of the LUIPs with the annual premium of up to or below Rs 2.5 lakh are still available.
An aspect to remember is that the new taxation rule for ULIPs is only applicable for fresh plans and not for existing ULIPs.
Deductions that can be claimed
Apart from Section 80C, you can also claim a range of deductions under Section 80D, E, EE, G and GGC, among others. Under 80D, medical insurance premiums paid are eligible for a deduction of up to Rs 75,000, if an individual, spouse and children, apart from additional rebates for senior citizen parents are claimed. It may be noted that these are not necessarily investments but deductions. Interest on education loans under Sec 80E is liable for deduction. Donations made under 80G and 80GGC are also liable for deductions. Sec 80EE also gives you the option of additional tax deductions on the interest portion of the home loan. However, these are not investment options but deductions that you can claim.
You can opt for tax saving investments under Sec 80C or other investments as well to save taxes. These include ELSS, PPF, tax-saving FDs, post office RD and ULIPs, among others. You would need to consider the lock-in periods, investment tenures, interest rates and then pick the options that help you maximise tax savings.