“Never depend on a single income. Invest to create a second source of income.”-Warren Buffet.
Pramod read this quote and wondered how he could start investments in life because his responsibilities were soon to rise. Quite a portion of his salary was given away in income tax. In addition, he was soon to get married, which created pressure to bring stability in life. For Pramod, investments were the only key that he thought could bring in some peace. He found the best investment tools that were popular and profitable. After much research, Pramod picked a ULIP plan and bought a term insurance policy. He thought while living, he could fetch some benefits from a ULIP policy, and the term plan will help the family if anything unfortunate happens with Pramod. Along with these, the insurance and the investment plans can help him lower income tax liability.
Read further if you are worried about the family’s future and are willing to create a tax saving plan to reduce your income tax liability.
What is income tax liability?
Income Tax liability is the amount of tax owed to the government for a particular period by the individual or a business house (local, state or federal). For example, you pay income tax to the government to enjoy the benefit of infrastructure and development. These facilities include roads, healthcare facilities, etc.
In 2020-21, more than 2.38 crores taxpayers filed their income tax returns. Of these, 1.68 crores of income tax returns have been processed, while refunds of Rs.64 lakhs have been issued.
Along with laying guidelines to file income tax, the government of India has laid the income tax liabilities depending on the income. Therefore, the individuals will have to pay tax based on the income slabs.
|Income Tax Slab||New Regime Income Tax Slab Rate FY 2020-21|
|Rs 2.5 lakhs- Rs 3.00 Lakhs||5% (tax rebate u/s 87a is available)|
|Rs. 3.00 lakhs – Rs 5.00 Lakhs|
|Rs. 5.00 lakhs- Rs 7.5 Lakhs||10%|
|Rs.7.5 lakhs-Rs.10 lakhs||15%|
|Rs.10 lakhs-Rs.12.50 lakhs||20%|
|Rs. 12.5 lakhs- Rs. 15.00 Lakhs||25%|
|> Rs. 15 Lakhs||30%|
After understanding the income tax liability, and the percentage of taxes you have to pay, it is important that you think of saving money via lowering the income tax liability.
The government of India, while proposing the income tax rates also makes provisions so that the individuals can save taxes. But why do you have to save taxes?
Why do you want to lower your income tax?
When you lower your taxable income in the legal manner, you get more to spend in your hand.This implies that by lowering the income tax liability, you get to make use of the money wisely. For example from an income of Rs.6,00,000/- you have a tax liability of Rs.50,000/-. Now out of this tax liability, if you buy a health insurance policy with premium Rs.25,000/- you can save tax up to Rs.25k.
This implies that not only you could lower the income tax liability, which was reduced by 25k, you also made an investment of Rs.25k in your health plan. The health policy can further benefit you at the time of emergency.
There are other ways in which you can make the investments and lower the income tax. If you are interested to know, read further.
Best Investment Option to Lower Income Tax?
These are the best investment options or tax saving strategies to lower income tax in the year 2021-2023.
1. Invest in health insurance policy:
How beneficial can buying a health insurance policy be, you have already read above. Now if you want to save more, you can buy a health insurance policy for your spouse, children and dependent parents. The income tax deductions to lower tax liability will be:
|Eligibility||Deduction under Section 80D|
|Health insurance for individual, spouse, children (below 60 years)||Up to Rs.25,000/-|
|For Individuals and parents both below 60 years||Up to Rs.50,000 (Rs.25K+Rs.25K)|
|For individual below 60 years and senior citizen parents||Up to Rs.75,000 (Rs.25K+Rs.50K)|
|For Individual and parents (both above 60 years)||Up to Rs.1,00,000 (Rs.50K+Rs.50K)|
The rate of tax benefits depends on the current tax rates.
2. Buy a life insurance policy.
Tax benefits are available on both premium payments and the amount disbursed at maturity for life insurance contracts. Section 80C of the Income Tax Act provides for premium payments, while Section 10(10D) provides for the sum promised received at maturity or the insured’s untimely death, whichever comes first.
If the insurance is taken after 1st April 2012, however, tax benefits of up to 1.5 lakh spent on annual premiums can be claimed under Section 80C, as long as it is less than 10% of the entire value assured.
You can buy a ULIP, term, savings, pension, or child plan. The tax deductions under all of these plans are applicable under Section 80C.
3. Invest in government schemes
Government-sponsored plans provide significant returns on total investments as well as tax deductions. Individuals can claim up to 1.5 lakh in tax deductions on total annual income spent on such investments under Section 80C of the Income Tax Act.
You can invest in these schemes to lower the income tax liability.
- The Senior Citizen Savings Scheme is a programme that allows senior citizens to save money (SCSS)
- Sukanya Samriddhi Yojana (Sukanya Samriddhi Yojana) is a government (SSY)
- Public Provident Fund (PPF)
- National Pension Scheme (NPS)
- National Pension System (NPS)
4. Invest in ELSS
Another savings cum investment option that can save income tax for you is ELSS. Equity-Linked Savings Scheme is an investment tool of the stock markets. This tool comes with a lock-in period of 3 years. It is the shortest lock-in period available amongst all the other investment tools.
The taxpayers can claim a deduction of up to Rs.1.5 lakhs under Section 80C of the Income Tax Act, 1961. If the total capital gains are less than Rs.1 lakh, you will pay no tax will be paid.
5. Buy a Unit-Linked Investment Plan (ULIP)
A unit-linked investment plan is a dual benefit tool that gives you the life cover and benefit of investment. The premium paid under ULIP is invested either fully or partially. The amount is invested in different market funds. Investors can choose to invest in different funds. The premium invested can be claimed for tax deductions under Section 80C of the Income Tax Act.
Lowering tax liabilities will leave you with more savings. You will have more funds to invest and more money to save. Out of the tools mentioned above, you can make investments in the tools of your choice. Considering your requirement, you can pick tools and also make a combination of products to invest in . If you are unaware of investment practices, consult your financial practitioner.