Paying your taxes on time is your legal responsibility and essential for the country’s development. However, that does not mean you should not use the available lawful means to avail of tax benefits. The best way to do so is to find investment plans that offer tax-exemptions. You can reduce your tax liabilities and build significant wealth by investing in tax-saving instruments.
Here are a few ideas to avail of tax deductions in the financial year 2021-22.
- Take maximum advantage of Section 80C
When it comes to saving tax with investments, Section 80C of the Income Tax Act, 1961 can help you immensely. It allows you a tax deduction of up to INR 1.5 lakh per year on the premium paid for life insurance policies. You have to first learn the financial benefits offered by life insurance policies to understand how to invest money by investing in them.
Among all tax-saving investment options, a Unit-Linked Insurance Plan that you must certainly consider. It is a life insurance policy that provides investment-related options. The insurance company utilizes your capital in equity and debt funds to generate substantial returns. While ULIPs help you create a fortune over an extended period, they also let you save on tax. Every year you pay a premium for your ULIP, you can get a tax deduction of up to INR 1.5 lakh under Section 80C.
You can enjoy the same tax benefit under other life policies, such as a term insurance plan. You can invest in a term life insurance policy to protect the future of your dependents. It is an affordable and pure form of life policy that only pays the sum assured if an unfortunate event leads to the policyholder’s death. Its premium payments are tax-deductible up to INR 1.5 lakh per year under Section 8C.
- Seek exemptions under Section 80CCD
Other investment plans let you save on tax under Section 80CCD of the Income Tax Act, 1961. Atal Pension Yojna (APY) and National Pension System (NPS) are two plans that help you create a retirement fund. Section 80CCD allows you a tax deduction of up to INR 50,000 on your returns from these investment instruments.
NPS is one scheme that offers good returns on your investment along with tax benefits. When you invest money in NPS, the fund managers invest 50% of it in market-linked instruments. They put the remaining amount in government bonds and other debt funds. By investing in NPS, you can save a tax on the returns earned under Section 80CCD.
- Reap benefits under Section 10(10D)
Section 10(10D) of the Income Tax Act, 1961 is another provision that offers tax exemptions on returns generated by life insurance policies. For most life insurance plans, you can get tax-free death benefits and maturity payouts under Section 10(10D).
For example, ULIPs offer tax-free sum assured if an unavoidable incident results in the policyholder’s demise during the plan’s tenure. For ULIPs initiated before February 1, 2021, the maturity benefit is entirely tax-exempt under Section 10 (10D). With potentially high returns on investment and tax benefits, a ULIP can be a great tool to earn substantial profits. However, if you bought the policy on or after that date, you can get a tax-free maturity payout only if your yearly premium is under INR 2.5 lakh. If your annual premium for ULIP is more than INR 2.5 lakh, you have to pay a 10% long-term capital gains (LTCG) tax on the maturity value.
Now that you know how to invest money to save tax, your next goal must be to find the right products. Comparing the investment instruments based on their tax benefits, cost, and earnings can help determine which option suits you the most.