Barely nine days are left for taxpayers to plan their taxes in a way that they incur a minimum tax liability. In most cases, tax savings is a concern. What if you could plan your taxes so that you could maximise the returns on your investments too?
It is common behaviour to scramble for investment options that can best fit under the various sections of the Income Tax Act. However, instead of looking at investments merely from a tax savings point of view, a better and more convenient way would be to plan your investments and check if they also qualify for tax exemptions. If you are salaried and are looking to file your taxes this year, an understanding of the following investment options along with their tax implications can help.
Provident Fund Schemes/ELSS
You have always heard of how you can avail of tax exemption up to ₹1,50,000 under Section 80C of the Act. Investments made in various provident funds including the Employee Provident Fund (EPF) and Public Provident Fund (PPF) ensure that you earn good returns beyond seven per cent sans the effect of market volatility.
Alternatively, you may opt to invest in tax-saving equity-linked savings schemes (ELSS) of various mutual fund houses. The money paid through systematic investment plans (SIPs) every year is deducted from your gross total income, which means you pay tax on a lower net income value.
Since ELSS comes with a three-year lock-in period, you can always withdraw your present investments and re-invest the amount to avail of tax exemption. However, if you are looking to build a corpus, then refrain from withdrawing your capital and returns. Instead, infuse fresh capital through SIPs with regular frequency to stay invested in the market and earn from its movements.
National Pension Scheme
This is a pension scheme that diverts a part of your contribution to stocks, thus, enabling you to earn market-related returns. Contributions towards the NPS scheme is eligible for an additional income tax deduction up to ₹50,000 under Sec 80CCD(1b) of the Act. If you can accomplish your goal of crediting ₹50,000 to your NPS account each year, you not only avail yourself of a pension scheme, an essential element of retirement planning but also save on tax liability.
Interest on home loans
We all know how the principal component on home loan repayment is subject to Section 80C of the Act. However, you can claim a tax deduction on the interest component too. If you are paying equated monthly instalments (EMIs) for a housing loan, it has two components including:
- Interest payment
- Principal repayment
The interest portion of the EMIs paid for the year can be claimed as a total deduction from your total income up to a maximum amount of ₹2 lakh under Section 24 of the Act. For the property already let out on rent, there is no upper limit for claiming interest.
Choose the correct tax regime
You may choose to file your taxes under the old system or opt to pay tax under the new Income Tax slab. The tax rates under the new slab are low whereas you can save a lot through deductions under the old tax regime.
Assess your total income, investments, earnings and expenditure, and then decide under which slab you would like to pay your taxes.
While you plan your investments carefully, pay attention to those investments that not only earn you good returns but also reduce your tax outgo. However, do not plan your investments surrounding your tax liability, else there are chances that you will lose out from accomplishing your financial goals.