In the ever-evolving landscape of taxation, navigating the maze of tax exemptions can be quite a challenge. If you are still operating within the old tax system, the need to explore investment options for tax exemptions is paramount. However, these investments should not only be about saving tax but also about securing your financial future in the long run. Equity-based investments are a valuable avenue to explore in this endeavor.
In this blog post, we will delve into the details of three important tax-saving investment schemes under the old tax system.
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Understanding the Tax-Saving Investment Schemes
In the current financial year, both the old tax system and the new tax system coexist. If you opt for the new tax regime, you will not be liable to pay any tax on income up to Rs. 7,50,000, which includes a standard deduction of Rs. 50,000. Hence, there is no immediate need for investments to save on taxes in this scenario. Tax-saving schemes become a consideration only when you choose to operate within the old tax system.
Under the old tax system, tax is payable once your income exceeds Rs. 2,50,000, and it is calculated based on the applicable income slabs. The Income Tax Act of 1961 provides various ways to reduce your tax liability, with Section 80C being a prominent avenue. This section allows for a reduction in taxable income by investing up to Rs. 1,50,000 in various financial instruments during a financial year.
Notable options falling under this section include the Employment Provident Fund (EPF), five-year tax-saving bank deposits, premiums on life insurance policies, Public Provident Fund (PPF), National Savings Certificates (NSC), Senior Citizen Savings Scheme (SCSS), Equity-Based Savings Scheme (ELSS), Home Loan Principal Payment, and tuition fees paid for up to two children, among others.
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Equity-Based Savings Schemes (ELSS) – Tax-Saving Investment Schemes
While schemes offering fixed returns may not keep pace with inflation and are subject to taxation, equity-based investments bring the promise of substantial growth over the long term. Despite some inherent market risks, the tax burden on the income generated from such investments is relatively light.
Equity-Based Savings Schemes (ELSS) are particularly attractive for those seeking tax savings coupled with higher investment returns. These schemes invest a significant 80% of their portfolio in equity and equity-based instruments, necessitating a minimum investment horizon of three years for optimal benefits. In fact, longer holdings in ELSS schemes tend to yield even better equity returns.
Investors have the option to invest in ELSS either in a lump sum or through a systematic investment plan (SIP). The latter strategy allows you to leverage market fluctuations to your advantage, making gradual investments a prudent approach.
The beauty of ELSS lies in the freedom to continue the investment for up to three years, eliminating the need for hasty withdrawals and ensuring the potential for sustained growth.
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Unit-Based Insurance Policies (ULIP) – Tax-Saving Investment Schemes
Unit-Based Insurance Policies (ULIPs) present a unique opportunity to combine investment in the stock market with insurance protection. This all-in-one package is ideal for individuals who prefer not to manage investment and protection separately. Typically, ULIPs are long-term schemes with durations ranging from 15 to 20 years. When selecting a ULIP, consider factors such as your age, premium capacity, tenure, and evolving financial needs at different life stages.
Long-term ULIPs generally offer the most advantages, with premium payments required for the entire policy term. Most ULIPs offer a range of 5 to 9 funds, including equity and debt options, which can be tailored to your financial objectives. These funds encompass small, mid, and large-cap investments, alongside multi-cap and thematic funds, each catering to various risk tolerances. Transferring investments from one fund to another is possible, subject to specific terms and conditions.
When considering ULIPs, ensure that you can commit to paying the premium for at least 10 to 15 years, with the option for partial withdrawals after five years. Gradual withdrawals can help your investment continue to grow over an extended period.
National Pension Scheme (NPS): Tax-Saving Investment Schemes
Besides tax savings, the National Pension Scheme (NPS) merits attention for its post-retirement benefits. Investing in the NPS offers a path to a secure pension after retirement, with the pension amount contingent on your investment. This market-based scheme does not guarantee fixed returns but can be a prudent long-term financial strategy.
With NPS, you can withdraw 60% of your deposited amount upon retirement, while the remaining 40% must be used to purchase annuity schemes that provide your pension income.
NPS offers two choices: Active Choice and Auto Choice, which can be tailored according to your age and risk tolerance. The investment options include equity, fixed-income schemes, and government securities.
Under Section 80 CCD (1B) of the Income Tax Act, you can avail of a special deduction of up to Rs. 50,000 when investing in NPS.
Disclaimer:
The content provided in this web post is for informational purposes only and should not be construed as financial advice. Readers are encouraged to consult with financial professionals before making any significant financial decisions.
