Tax Saving Plans For 2022: Procrastinating Tax planning for ages? Today is a good day to start!
The regular ways of saving tax have always clouded our vision against the real gems. The most procrastinated task of every employee is to dig in the right way or the perfect combination of ways through which one can save tax. Rightly so, plenty of good and bad options are available today, but it is not easy to pick just the perfect one.
Factors To Consider
Tax-saving isn’t as complex as it seems. Financial jargons have always scared the daylight out of the populace, making them obliged to pick the options followed by the herd. Just a few considerations and awareness beforehand may not only help one to get a clear understanding but also ace the game of tax-saving. Yes, a smarter approach is the only ingredient here!
One, estimate the tax you wish to save. Getting a clear estimate of your tax liability to determine the amount of tax you require to save is the first step toward efficient tax-saving. Second, calculate your risk-taking capacity wisely. Third, your investment budget must be smartly devised to figure out whether a lump sum or SIP strategy would work best for you. Fourth, having a clear idea of your financial goals offers a robust roadmap for your complete tax planning. Finally, it is extremely crucial to check the extent of exemption offered by your plan.
Now that you are fit to make a sound call, read on to have a glance at our top picks.
Best Picks Of Tax-Saving Schemes
1. ELSS Mutual Funds
Lock-in period: 3 Years (Minimum)
Returns: Not Fixed
Risk Involved: Moderate-High
Tax-saving Under Section: 80C of the Income Tax Act, 1961
Best For: Risk-averse investors, short-term investors.
The Equity Linked Savings Scheme (ELSS) is hands down the most preferred pick of ace tax savers. Its supremacy lies in the duo benefit of huge market-linked returns and tax-savings. Not to miss, it invests a substantial part of the portfolio in equity. With ELSS Mutual Funds by your side, you get the benefit of a tax rebate of up to Rs.1.5 lacs. Whether you go for a systematic investment plan or prefer a lump sum investment, you don’t miss out on the tax deduction benefit.
Advantages:
Ease: The ELSS offers its users both the lump sum and the SIP option, making it more convenient for every investor.
Door To Equity: ELSS is a great way to move forward towards equity, as it invests most of its portfolio in equity.
Briefest Lock-In Period: Check everywhere, and you won’t find an investment product with a lock-in period of only 3 years.
Wallet Friendly: The SIP option for ELSS makes it an affordable choice for everybody.
Wealth Generation: With ELSS, you get a huge return capability as compared to other options.
Superb Diversification: The investment encompasses various equity mutual funds.
Tax Benefit: You get the benefit of tax deduction under section 80C of the Income Tax Act, 1961.
Disadvantages:
Greater Risk Involved: Since it has massive exposure to risk markets, it is not suitable for risk haters.
Limited Tax Benefit: No matter how large the investment amount is, one can only avail of a tax benefit of Rs. 1,50,000/-
Involves Management Cost: Management requires the aid of professionals, and thud the management cost.
2. National Pension Scheme
Lock-in period: Until age 60
Returns: 9% to 12%
Risk involved: Low Risk
Tax-saving Under Section: 80CCD (1) and 80CCE.
When looking for the best tax-saving schemes, one cannot overlook the National Pension Scheme. It is perhaps the most widely cherished income tax-saving product, that caters to the wishes of both government and private employees. Simply stated, it allows the depositor to build a robust corpus.
There are mainly two types of NPS accounts, Tier 1 and Tier 2, but only one of them gives you the tax deduction benefit. The lock-in period of Tier 1 is until the subscriber turns 60. Section 80CCD (1) and 80CCD(1B) of the Constitution supports tax deduction through Tier 1. However, while a Tier 2 account is voluntary in style and thus gives the subscriber the comfort of withdrawing the amount anytime, it does not support tax deductions.
The reason why NPS is considered a promising choice is that according to the Section 80CCD provision, one can claim up to a deduction of Rs. 1.5 lacs in tax through NSP. Not to miss, the newly introduced sub-section 1B offers an additional deduction of up to Rs. 50,000/- against the individual taxpayer’s contributions towards NPS.
Advantages:
Handsome Returns: A substantial part of the portfolio is invested in equity, thus assuring higher returns.
Effortless Documentation: Only the identity proof, address proof, and NPS form is required, and you are good to go.
Highly Affordable: The Tier 1 account demands a minimum of Rs. 500/- as investment, and Tier 2 demands a minimum Rs. 1000/-.
A Plan For All: Every citizen of India or NRI from age 18 to 60 is eligible.
Safe Returns: All investments in the scheme are shielded through regulations.
Disadvantages:
Voluntary Withdrawal Prohibited: All withdrawals are restricted before the subscriber turns 60.
Taxable NPS Corpus: Only 40% of the investment escapes taxation.
Restrictions on Investment: Investing more than 50% of the total investment in the NPS account towards equity is prohibited.
3. Unit-Linked Insurance Plans
Lock-in period: 5 Years (Minimum)
Returns: Not Fixed
Risk Involved: Moderate
Tax-saving Under Section: 80C of the Income Tax Act, 1961
Best for: Risk-averse investors.
Talk about good tax-saving schemes in a group and you will know the popularity of ULIP plans. It is one of the most crucial long-term investment plans across the country. In misfortunes like death, this plan serves as a financial relief for your dear ones. And yes, you get the benefit of saving your taxes through this one.
The Section 80C of the income tax act 196, clearly states that the premium amounts paid for a life insurance policy make it eligible for a tax deduction of up to Rs. 1.5 lacs. Moreover, you also get a tax-free maturity income of your policy, as per section 10 (10D).
Advantages:
Partial Withdrawals Permitted: Unlike many other schemes, ULIP allows for 20% of the fund value after the lock-in period.
Flexibility: ULIP investors enjoy flexibility in switching between investment funds as and when their needs change.
Perfect For Long-Term Investors: ULIP schemes are profitable for long-term investments.
Disadvantages:
Complex: ULIPS are a blend of insurance and investments, thus making it a bit complex and lacking crystal-clear transparency.
Not For Short-Term Benefits: Market fluctuations affect the revenues for ULIPs and thus, it is suitable for only long-term investments.
4. Public Provident Fund
Lock-in period: 15 Years
Returns: 7.1%
Risk Involved: Low
Tax-saving Under Section: 80C of the Income Tax Act, 1961
Best for: Investors with low-risk appetite
The popularity of the Public Provident Fund is unmatched in the tax-saving world. It falls under the exempt tax status category. One can easily open a PPF account with the help of a bank or post office. After the maturity of the policy, one has the liberty to either withdraw the proceeds or continue the policy for 5 more years.
Advantages:
Secure Investment: Completely backed and encouraged by the Government of India, this plan safeguards the investment against all possible defaults.
Assured Returns: First, the returns on the investment are compounded annually, and second, the ROI is quarterly revised.
Disadvantages:
Longer Lock-in Period Duration: The plan mandates a lock-in period of 15 long years.
Upper Investment Limit: Investments above the upper limit of Rs. 1.5 lacs do not give you any returns.
5. National Savings Certificate
Lock-in period: 5 Years
Returns: 6.80%
Risk Involved: Low
Tax-saving Under Section: 80C of the Income Tax Act, 1961
Best for: Investors with low-risk appetite
Tax-saving isn’t only the game of huge-income investors! The government of India aims to make tax-saving an effortless process for both middle- and small-income investors while hoping for outstanding returns with its initiative of the National Savings Certificate. For people who do not like involving huge risks in tax planning, this investment product proves to be a pair made in heaven. Yes, it involves very low risks. Moreover, the product is flexible to encompass a wide array of investors without demanding them change their investment habits. When you get guaranteed interests, utmost capital protection, and tax exemption of up to Rs. 1.50 lacs with one product, you breathe an air of relief!
Advantages:
No Upper Limit: Investments can be done starting from just Rs. 100. Also, there is no upper limit on the amount of investment.
Can Be Used As Collateral: This plan can be made to use as collateral for securing loans.
Disadvantages:
No Reinvestment Option: One would require to purchase a new certificate every time s/he plans to invest in the plan.
Fixed Interest rate: If the interest rates fall below inflation, the chances of real returns are low.
6. Health Insurance
Waiting period: 2-4 Years
Tax-Saving Under Section: 80D of the Income Tax Act, 1961
Life is unpredictable, but handling medical mis-happenings becomes bearable when you have a Mediclaim. However, people sometimes underestimate its merits, especially when we talk about its tax-saving benefits. Yes, apart from covering accident and/or hospitalisation expenses, health insurance also gives you the benefit of tax-saving under Section 80D. One becomes eligible for this facility in case of an insurance premium up to Rs.20,000 in case of senior citizens or Rs.15,000 for the rest. Additionally, the maturity amount is tax-free for the sum received in case of critical illness insurance policies.
Advantages-
Your Savings Are Protected: In times of adversities, your hard-earned savings are shielded when you have health insurance coverage.
Health Checkups: Most health insurance plans offer the added benefit of free-health check-ups.
Covers Various Health Needs: Most health insurance plans are tailor-made and offer coverage for a wide array of health needs including critical illnesses.
Disadvantages-
Hikes In Premium: As the subscriber ages, the premium also increases.
Premium Loading: An increase in the health risk profile also loads the extra amount on the individual’s premium.
Capping on Coverage Limit: A few health insurance schemes involve capping or sub-limit, restricting the coverage amount that the subscriber can claim.
7. Sukanya Samriddhi Yojana
Lock-in period: 21 Years
Returns: 7.60%
Risk Involved: No Risks
Tax-saving Under Section: 80C of the Income Tax Act, 1961
As a part of the Beti Bachao, Beti Padhao initiative by the Government of India, the Sukanya Samriddhi Yojana has proved to be an outstanding investment product and tax-saving scheme. Through this program, the taxpayer is enabled to invest regular deposits while also earning interest on. Not to miss, it allows for tax deduction under section 80C of the income tax act.
The rate of interest is determined on a quarterly basis and is payable on maturity.
Advantages:
Allows For Triple Tax Benefit: Investment up to Rs.1.5 lacs allows for tax deductions; you get tax-free interest on deposit; the maturity amount is also tax-free.
Affordable Minimum Amount: The SSY plan supports a minimum deposit amount as low as Rs. 250/-.
Disadvantages:
Long Lock-in Period Duration: This plan comes with a lock-in period of 21 years.
Premature Withdrawal Prohibited: This makes it unfit for short-term investments.
Not More Than Two Accounts Allowed: The plan isn’t available for the third girl child if two girl children already have an account each.
| Name Of Plan | Returns | Tax saving Under Section |
| ELSS Mutual Funds | Not Fixed | 80C of the Income Tax Act, 1961 |
| National Pension Scheme | 9% to 12% | 80CCD (1) AND 80CCE of the Indian Tax Act, 1961 |
| Unit Linked Insurance Plans | Not Fixed | 80C of the Income Tax Act, 1961 |
| Public Provident Fund | 7.1% | 80C of the Income Tax Act, 1961 |
| National Savings Certificate | 6.80% | 80C of the Income Tax Act, 1961 |
| Health Insurance | Not Fixed | 80D of the Income Tax Act, 1961 |
| Sukanya Samriddhi Yojana | 7.60% | 80C of the Income Tax Act, 1961 |
The Takeaway
While tax planning often involves rigorous study, it isn’t an impossible task to attain a smart balance. No matter how many pros a plan may offer, it is always advisable to plan according to one’s short-term and long-term plans. Also, investing in getting professional help goes a long way.
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