A wise person once said thatthere is nothing certain except death and taxes in this world. However, tax planning helps one to dilute the inevitability of taxes. We shall discuss the various tax-saving options available in India to individuals and HUF taxpayers.
Tax Saving Products Under Section 80C
Section 80C of the Income Tax Act, 1961 includes various investments and expenses you can claim deductions on – up to the limit of Rs.1.5 lakh in a financial year.
- 5-year Bank Fixed Deposit
- National Pension Scheme
- Public Provident Fund
- Sukanya Samriddhi Yojana
- Senior Citizen Saving Scheme
- National Savings Certificate
- Principal component of housing loan
- School fees (upto 2 children)
- Unit Linked Insurance Plan
- ELSS Funds
Tax Saving ProductsOther Than Under Section 80 C
In addition to the Section 80C deductions, there are various deductions under Section 80 you can use to save on income tax:
- Medical insurance premium can be claimed as a deduction under Section 80D upto Rs.50,000/- (Rs.25,000/- for self, spouse, and children and Rs.25,000/- for dependent parents below 60 years).
- Interest paid on a home loan can be claimed as a deduction under Section 24 up to Rs.2 lakh. Further, under Section 80EE you can claim a deduction of up to Rs.50,000/- on home loan interest, which is over and above the limit of Section 24.
- Interest that is paid on an education loan is entitled to a deduction under Section 80E.
- Further, a deduction under Section 80G is available for any donation to any charitable or notified institutions or funds.
How Does NPS Differ From the Above-Mentioned Products?
National Pension Scheme or NPS was introduced with effect in January 2004to provide retirement benefits to all citizens of India, including those working in the unorganized sectors. NPS is implemented and regulated by Pension Fund Regulatory & Development Authority (PFRDA).NPSintendsto generate income for senior citizenspost-retirement to sustain themselves well in their sunset years.Any Indian national between the age of 18 and 65 years can join it. The scheme is categorized into two tiers:
- Tier-I account: In this,savings are deposited and invested according toinvestor’s option, subject to the condition that no withdrawals are allowed.
- Tier-II account: It is a voluntary account that is permitted only when there is an active Tier I account in the name of the investor. Withdrawals are allowed from this account according to the needs of the investor.
Tax benefits of NPS are not limitedto Section 80C. Under Section 80CCD (1B), an additional tax benefit is given only to NPS investors. Under this section, you can claim tax deductions for additional investments in NPS up to Rs 50,000/-. This deduction is in addition to the deduction that is available under Section 80C.
This means that you can claim tax deduction up to Rs.2 lakh simply by investing in NPS – Rs 1.5 lakh under Section 80C and another Rs.50,000/- under Section 80CCD (1B). So, if the tax bracket of 30% is applicable, you can save uptoRs.62,400/- in taxes.
In addition, under Section 80CCD (2), the tax benefit can be availed of the contributions made by the employer.While government employees can claim up to 14% of their salary as a tax deduction under this section, private-sector employees can claim up to10% of their salaryas a tax deduction. However, this sectionapplies only to a salaried individual and not a self-employed person.
- India’s pension assets under management (AUM) are estimated to have touched Rs.7.5 lakh crores by the end of March 2022. It is PFRDA’sendeavour toachieve an AUM of Rs.30lakh crore by 2030.
- PFRDA has propositioned a guaranteed return plan, viz., Minimum Assured Return Scheme (MARS), which will provide investors an option for their investments.
- About the proposal:To have a separate scheme that can offer a guaranteed minimum rate of return to NPS subscribers, especially risk-averse ones.Under MARS, any shortfall shall be made good by the sponsor, and the surplus will be credited to the investor’s account.
- Options that will be offered:
- Fixed Guarantee Option:The guaranteed return is fixed along the accumulation phase under this option.
- Floating Guarantee Option: Under this option, the guaranteed rate of return is not fixed along with the savings phase.The floating guarantee depends on the marketmovements of the 1-year interest rate until retirement.
- Limit of Contribution:PFRDA may prescribe minimum and maximum monetary limits on individual contributions. The minimum guaranteed return will remain an attraction for investors.
- Lock-in-Period:A lock-in period may apply to each contribution made under this scheme.This lock-in will be applied based on the period since the contribution has been made. However, there isno guaranteed rate of return applied on the investment after lock-in period.
The above developments are targeted at investors who are risk averse and prefer a steady return. As is observed in various market linked investments, staying invested for a longer time provides a high probability of benefitting from the power of compounding.