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Business News/ Money / Personal Finance/  3 simple tax-saving measures that are equally effective in creating wealth

3 simple tax-saving measures that are equally effective in creating wealth

Your investments don’t always have to be complex or tailored to market conditions. Selecting the appropriate tax-saving investment option in India, one that is both simple and effective hinges on your financial objectives, risk tolerance, and investment horizon.

Simple measures that can help you save on taxes.Premium
Simple measures that can help you save on taxes.

The deadline for tax-saving investments for the fiscal year 2023-24 is March 31, 2024. With limited time to explore tax-saving options, it’s essential to consider straightforward measures that can aid in tax savings while facilitating the accumulation of necessary wealth.

Also Read: ITR filing 2024: Here's how to maximise income tax savings from Employees' Provident Fund (EPF) account

How to choose tax-saving investments?

Several critical factors to contemplate when selecting a tax-saving investment comprise:

Lock-in duration: This denotes the minimum period you’re required to retain the investment before being able to withdraw funds. Certain tax-saving choices, such as the Public Provident Fund (PPF), entail lengthy lock-in periods, whereas others like tax-saving fixed deposits might have shorter durations. Evaluate your financial objectives and the urgency of accessing funds.

Early withdrawal terms: While some investments permit withdrawals before the lock-in period concludes, they often entail penalties or constraints. It’s crucial to comprehend the conditions linked with premature withdrawals for each option under consideration.

Taxation on interest income: Tax-saving investments vary in their treatment of interest earnings. While some may incur taxes on interest earned, others may offer complete tax exemption (Exempt-Exempt-Exempt) on investment, interest earned, and maturity proceeds. Select an option that aligns with your tax-saving objectives.

Maturity proceeds: This refers to the total sum received upon the conclusion of the investment term. Evaluate your financial requirements and determine the amount needed at the maturity date.

Consider these supplementary factors as well.

Risk appetite: Tax-saving alternatives encompass diverse risk levels. Equity-linked instruments such as an equity-linked saving scheme (ELSS) present potentially higher returns coupled with market volatility, whereas PPF assures returns albeit with limited growth potential.

Investment size: Certain options may impose minimum investment thresholds, thus factor this into your decision-making process.

Investment duration: Determine the duration of your investment. Ensure it aligns with the lock-in period of your selected option.

By conscientiously weighing these factors, you can select a tax-saving investment that harmonizes with your financial objectives, risk tolerance, and tax-saving requirements. 

Also Read: Income Tax: Investing the equity proceeds in ELSS before March 31 will save you tax. 5 key provisions explained

Simple and popular tax-saving options 

Below are four tax-saving investment alternatives that not only aid in income tax reduction but also generate tax-exempt returns. It’s essential to note that these tax advantages apply solely to individuals who choose the old tax regime.

Public Provident Fund: PPF stands as a favoured tax-saving avenue in India, falling within the purview of Section 80C of the Income Tax Act. Firstly, it’s noteworthy that PPF falls under the "exempt-exempt-exempt" (EEE) category. 

Essentially, this signifies that the investment made in PPF qualifies for deduction from your taxable income under Section 80C (up to a prescribed maximum limit). The interest earned on your PPF investment remains entirely tax-free. Furthermore, the entirety of the maturity sum received after the investment tenure is also exempt from taxation.

The triple tax exemption feature renders PPF an exceptionally appealing choice for individuals seeking long-term savings and tax reductions. Below are some supplementary advantages of PPF to take into account:

  1. Safe and assured returns: This fund, being supported by the Government of India, ensures a secure and stable investment avenue with guaranteed returns.
  2. Long-term savings: This simple investment entails a 15-year lock-in period, fostering a culture of long-term saving habits.
  3. Partial withdrawals permitted: Despite its lock-in period, PPF permits partial withdrawals under specific conditions after the fifth year.

While PPF presents a favourable combination of tax advantages, security, and guaranteed returns, it’s crucial to acknowledge that it may not be suitable for all individuals.

Also Read: Sukanya Samriddhi Yojana: How to accumulate 69 lakh when your girl turns 21

Sukanya Samriddhi Yojana (SSY): The Sukanya Samriddhi Yojana stands as a commendable initiative by the Indian government aimed at fostering girl child education and financial security. Let’s outline the fundamental characteristics of SSY:

  1. Eligibility: The scheme is accessible to girl children up to the age of 10 years, with only one account permissible per girl child.
  2. Investment: A parent or legal guardian is eligible to invest on behalf of the girl child. The scheme mandates a minimum annual investment of 250 and a maximum of 1.5 lakh every year.
  3. Long term: The account matures either after 21 years from the date of opening or upon the marriage of the girl child after she reaches 18 years of age, whichever comes first.
  4. Interest rate: Currently, SSY provides a competitive interest rate that is appealing compared to other small savings schemes. The interest is compounded annually.
  5. Tax benefits: Contributions made towards SSY are eligible for deduction under Section 80C of the Income Tax Act. Additionally, the interest earned and the maturity amount remain tax-free.

Below are some supplementary aspects to ponder regarding SSY:

  1. Lock-in period: SSY imposes a lock-in duration of 21 years, except for premature closure due to specified reasons such as the medical exigency of the girl child.
  2. Partial withdrawals: After the girl child reaches 18 years of age, SSY permits partial withdrawals, subject to specific conditions.

If you seek a long-term tax-saving investment tailored for the welfare of a girl child, the Sukanya Samriddhi Yojana emerges as a highly appealing option. It boasts of a competitive interest rate, provides tax advantages, and aligns with a noble social cause.

Employees Provident Fund (EPF) and Voluntary Provident Fund (VPF): Salaried individuals participating in the Employees’ Provident Fund scheme must allocate 12% of their salary towards their EPF account, while their employer matches this contribution. The 12% contribution is commonly determined by the employee’s basic salary and dearness allowance (DA). The EPF scheme provides numerous advantages, such as:

  1. Tax advantages: Contributions made by employees to EPF are eligible for tax deduction under Section 80C of the Income Tax Act.
  2. Interest accumulation: EPF accounts accrue interest on the balance accumulated.
  3. Retirement funds: The accumulated balance in the EPF account can be withdrawn upon retirement.

EPF stands as a significant social security scheme aiding salaried individuals in constructing a retirement fund.

Also Read: EPFO: Want to make changes in your profile online? Fill joint declaration form. A step-by-step guide

The mentioned options are straightforward yet impactful, particularly for individuals reluctant to engage with market-linked investment choices. However, the investment horizon plays a crucial role. Determine the duration you intend to invest for and align it with the lock-in period of the option. Additionally, consider the tax exemption type provided by each option (EEE vs deduction on investment only). Lastly, ensure your investment aligns with your objectives, such as retirement planning or funding your child’s education.

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Published: 22 Mar 2024, 09:03 AM IST
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