Often, people end up paying taxes more than they should because of lack of awareness. If you file your own taxes it is quite possible that you might commit the same mistake. This blog discusses the best tax saving funds in India and different ways of how to save income tax in India.
ELSS Mutual Funds
This remains the best tax saving mutual funds in India despite the introduction of the tax on long-term capital gains from equity funds. The 10% of the tax is applicable only on the gains beyond Rs 1 lakh. Routine collection of capital gains can decrease the liability to a great extent. It also provides the highest returns among other 80C options. ELSS funds have the lowest lock-in of about 3 years and the return of the past three years has been 9.78%.
There are other problems present as the Equity markets were unpredictable last year and 2019 may not be any different. The economy has slowed down. This should not worry the long-term investors who stagger their purchases and average out their costs through monthly SIPs. But the SIP window is not applicable for taxpayers who have to show proof of Section 80C tax-saving investments in a few days.
“A lot of taxpayers are eager to invest in ELSS funds but we don’t want them to invest recklessly. If a first-time investor loses his/her money, they remember it for a lifetime and would stay away from the equity for a long time.” Says Shweta Jain, CEO, and Founder, Investography a Bengaluru – based financial advisory firm. She advises taxpayers to not put a large sum into ELSS funds at one go, distribute it over 2-3 tranches before the 31st March deadline.
It should be noted that the risk is equal with all ELSS funds. Some invest more in small and mid-cap stocks while others invest more in large-cap ones. As the ELSS provides numerous benefits, it is currently the best tax saving mutual funds in India.
The best ELSS funds
National Pension Scheme
At the time of retirement, 60% of the corpus is tax-free. People can keep investing in NPS until the age of 70. They can also stagger their withdrawals.
Additionally, investors can also allocate 75% to investments in the active choice option of the National Pension Scheme. Even though short-term returns may not seem very beneficial, in the long run, investors earn double-digit returns. Return of NPP has been 10.84% in the past five years.
“According to experts, NPS is the better alternative to PPF and bank deposits.”
National Pension Scheme helps people save income taxes in 2 ways:
People can declare contributions of up to 1.5 Lakh INR as a deduction under section 80C.
Furthermore, 50,000 INR can be deducted under 80 CCD(1b), Employers can deposit 10% of the salary of employees in NPS. The capital will not be taxable.
Public Provident Funds (PPF)
PPF funds is a savings fund provided by the Indian Government. The government pays the interest. The interest rate for PPF is 8 %.
In PPF helps save income tax by making the interest completely tax-free. Whereas in fixed deposits interest is taxable. Thus, advisors prefer PPF over fixed deposits. Public provident funds are also an easy investment and score high in terms of safety.
You can easily open an account in any post office branch. Some private banks also offer PPF.
Tax deductions for employed workers:
The income tax department allows multiple income tax exclusions for salaried employees. This proves to be very effective in saving taxes. To avail these benefits, workers have to inform their employers in advance.
The various income tax exclusions for salaried workers are listed below:
- HRA exemption for salaried employees.
- Income tax exemption on leave travel allowances.
- Exception on encashment of holidays for salaried employees.
- 4.Tax exemption from pension income.
- IT exemption on gratuity for salaried employees.
- Income tax exemption on VRS received.
- IT exemption for perquisites.
- Exemption of various allowance.
Loans to claim tax deductions
Home loans are a great way to save taxes. Under section 24, not only the principal repayment but also the interest is tax-free.
For self-occupied homes, the tax deduction limit is INR 2 lakhs. Although, if the property is rented out the interest goes tax-free. Moreover, first-time owners get additional INR 50,000 reduced under section 80E.
Higher education is increasingly becoming expensive. Education loans that are taken for spouses, offspring, or for students whose guardians are taxpayers are eligible for tax-free interest under section 80E. This reduces a huge burden on taxpayers. The loans must be taken from either a charitable or financial institute.
A simple way of saving income tax is through buying health insurances. Tax deductions can be made on the premium of the health insurances under section 80D. If you pay health insurance for yourself or for dependent family members the tax reduction is around 25,000 INR. For senior citizens, the tax reduction is 50,000 INR. If you pay a premium for dependent senior citizens then you receive an additional tax reduction of 50,000 INR. In this manner, you can save 1 lakh INR in tax reductions.
These are the easiest and most profitable ways in which you can save income tax and enjoy your rights while exercising your responsibilities simultaneously. Make sure before you invest anywhere you consult an expert to ensure your investment is safe.
How can I save my tax in India?