Tax Saving Options in India

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About Tax Saving

An income tax is imposed on an individual or a company by the Government of India only if his or her income is included in the slab of taxable income. The Indian Income Tax Act of the year 1961 governs the levy whereas C. B. D. T. (Central Board for Direct Taxes) governs the Department of Income Tax in India. However, as per some of the sections of this Act like Section 80 C, 80 CCF, 80 D etc., exemptions are given on certain incomes. There are many tax saving options, investing on which, one can get a deduction on his or her total income tax.

Tax Saving Options

India has got several government as well as private sector organizations offering numerous tax saving options to the residents of this country. Some of them are as follows:

Public Provident Fund

Commonly known as P. P. F., this tax saving option falls within the Section 80 C of the Income Tax Act in India. Public Provident Fund allows a maximum contribution of INR. 1,50, 000 per year. The return in this scheme is compounded annually at the rate of 8.7%. It is one of the long term ventures that does not allow complete withdrawal before 15 years. Post 7 years of investment, withdrawal is possible though. No tax is levied on the earned interest. Besides these, it even forms a retirement-planning tool. One can have such an account in either the State Bank of India or some of the nationalized banks or at some of the designated post office branches.

Benefits under Public Provident Fund (PPF)
  • The investor enjoys the rebate on his investment under section 80C of I.T. Act 1961
  • Interest income on PPF and the final amount is considered as tax free
  • Investment in small amounts can be made every year for a longer duration
  • Investments are fixed deposited for 15 years Balance amount held in Public Provident Fund is tax exempted from wealth tax
  • If one starts his/her PPF account in the year 2015, then the turn of events is shown as under. Starting from the seventh year one can reap the benefits of his/her PPF scheme.
Sl NoYearAmount of DepositPrevious BalanceInterestInterest EarnedBalanceEligible WithdrawalAmount
 Invest (1st Apr)      
1201515000008.70%13050163050 
220161500001630508.70%27235.35340285.35 
32017150000340285.358.70%42654.83532940.18 
42018150000532940.188.70%59415.8742355.97 
52019150000742355.978.70%77634.97969990.94 
62020150000969990.948.70%97439.211217430.15 
720211500001217430.158.70%118966.421486396.58266470.09
820221500001486396.588.70%142366.51778763.08371177.99
920231500001778763.088.70%167802.392096565.46484995.47
1020241500002096565.468.70%195451.22442016.66608715.08
1120251500002442016.668.70%225505.452817522.11743198.29
1220261500002817522.118.70%258174.423225696.53889381.54
1320271500003225696.538.70%293685.63669382.131048282.73
1420281500003669382.138.70%332286.254151668.381221008.33
1520291500004151668.388.70%374245.154675913.531408761.05


House Rent Allowance

House Rent Allowance is applicable if a fraction of your income is allocated as HRA or if you are paying your house rent. The maximum deduction is done on the basis of the lesser amount which is selected from either the total amount of rent paid or the amount allocated as HRA in your income slip, provided your HRA does not exceed 50% of your income (if you are residing in metro cities) and 40% of your income (if you are residing in other cities)

Unit Linked Insurance Plans

Covered by the Income Tax Act's Section 80 C, U. L. I. P. is a unique blend of investment and insurance that gives a tax exemption of INR. 100, 000 per year. Here, the premium, which is being paid by a customer, gets deducted with initial charges while the rest of the amount is invested. Such a plan can be of the following three kinds:
  1. Aggressive ULIPs where one can invest 80 % to 100 % in equities. The rest can be invested in debt instruments though.
  2. Balanced ULIPs where an individual can invest 40 % to 60 % in equities
  3. Conservative ULIPs, which allows one to invest up to 20 % in equities
Benefits under Unit Linked Insurance Plans
  1. Investments under ULIPs are eligible under Section 80C of the Income Tax Act.
  2. Maturity earnings from ULIPs are tax exempted

Equity Linked Saving Scheme

Popularly called E. L. S. S., this is a kind of mutual fund that comes within the Income Tax Act Section 80 C. With a minimum investment period of 3 years, this investment option helps one get exempted from income tax payment and offers an exemption of maximum INR. 100, 000 in a financial year as well. The interest rate depends on the performance of this scheme in a given year. However, if it does well, then it is more likely to increase even the interest rate of P. P. F.

Benefits under Equity Linked Savings Scheme (ELSS)
  1. The entire investments done under Equity Linked Savings Scheme qualify for tax deduction under 80C of Income tax Act, 1961.

Fixed Deposits

Fixed Deposits (FDs) are another popular tax saving option covered by the Section 80 C of the Income Tax Act. With a maximum exemption of INR. 100, 000 annually, the rate of interest varies from one bank or post office to another. However, the tax saving can only be done of FDs once you have invested for a minimum duration of 5 years. This scheme neither allows the encashment of the money prior to completion of the 5 years term nor can this be used as the security against any loan.

Salient Features of Tax Saving Fixed Deposits
Following are the salient features of tax saver fixed deposits in India:
  1. The fixed deposit is locked for 5 years. You cannot withdraw your investment prematurely.
  2. The minimum amount of purchase is 100 and then in multiples of that.
  3. The maximum amount of purchase is 1,00,000.
  4. The maximum amount of claim is 1 lac.
  5. The rate of interest varies, which can further change in future.
  6. It doesn't have sweep-in facility. It can't be linked to a savings account. Surplus fund of savings account can't be automatically invested in tax saver fixed deposits either.
  7. Relationship benefits are not offered on the India tax saver fixed deposits.

Employee Provident Fund

Famously called E. P. F., this scheme offers a total yearly exemption of INR. 100, 000 as mentioned in the Income Tax Act Section 80 C. In this fund, 10 % to 12 % of a person's basic salary gets deducted and the other 12 % is contributed by the employer. One can withdraw the entire amount in instances of leaving job, retirement after 58 years of age or taking V. R. S. Partial withdrawal can be done for home, medical or marriage related expenses though.

National Saving Certificate

This tax saving scheme known as N. S. C. helps one get exempted from tax by an investment of up to INR. 100, 000 per year under the Section 80 C of the I. T. Act of India. The interest rate is compounded half-yearly at the rate of 8 % and reinvested every year from the last year's N. S. C. The minimum period for this investment scheme is 6 years post which, one is provided with the entire interest along with the initial capital. The major benefit of this is that one can earn a maximum tax saving interest of INR. 100, 000.

Benefits under National Savings Certificate (NSC):
  1. The investor enjoys tax rebate on initial 5 years under section 80C of Income Tax Act
  2. Documentation can be guaranteed as safety against a mortgage to banks or Government Institutions Provision of encashment of documentations via banks.
  3. However, the investment in NSC is locked in for 6 years and is taxable under 'income from other sources'.

Infrastructure Bonds

Over and above the deduction allowed by the Section 80 C, one can save income tax on a maximum amount of INR. 20, 000, by investing in different infrastructure bonds. Covered by the Section 80 CCF of the Indian I. T. Act, this bond has got a lock-in period of 5 to 10 years. The rate of interest even varies from 8 % to 8.3 %.

Benefits under Infrastructure Bonds:
1. Investments in infrastructure bonds from different banks are eligible for a rebate under Section 88 of the Income Tax Act. However, the interest will be chargeable; the investor can assert tax exemptions against Rs.15,000 under Section 80L.

Insurance

Life insurance is among the best and authentic tax saving options covered within the Section 80 C of India's Income Tax Act. Though the policy allows a maximum deduction of INR. 100, 000 in a given financial year, but in case anyone surrenders the plan before paying two year's premium, then it will have reverse effect of tax benefit. However, the tax benefit for the premium is restricted to 20 % of the initial amount of the capital invested. Apart from that, this helps one plan for the unforeseen events in his or her life.

Benefits under Life Insurance Schemes
1. The investor can enjoy rebate on his investments under section 80

Health Premiums

Popular as Mediclaim Policies, which are a form of health insurance, comes within the Section 80 D of the country's Income Tax Act. Applicable even on the proprietor firm's cheques, these policies offers a maximum deduction of INR. 35, 000. This deduction is calculated in addition to any other tax saving done as per the Section 80 C. The total amount of INR. 35, 000 can be divided as follows:
  • INR. 15, 000: Premium for policies on spouse, children or self
  • INR. 15, 000: Premium towards policies for dependent parents, who are non-senior citizens
  • INR. 15, 000: Premium for dependent senior citizens
Besides saving your income tax, these policies even help you deal with your or your family's health related problems with ease during any emergency situation.

Tuition Fee

Covered under the Indian I. T. Act Section 80 C, payment made towards the education of children is even exempted from one's yearly income tax. Being a part of Section 80 C, one can get a maximum exemption of up to INR. 100, 000 per financial year. Tuition fee for school, college and university as well as coaching fee for varied competitive exams are considered under this policy. However, just 2 children are considered for such a kind of tax exemption.

Post Office Saving Options

Under the Section 80 C of the I. T. Act of the nation, one can invest in any of the different tax saving options provided by the post offices. Though, along with the terms and conditions, the interest rate as well as the tenure of the investment varies from one scheme to another, they provide a maximum deduction of INR. 100, 000. To name a few of such schemes offered by India Post are:
  1. Recurring Deposit Account (5 Year)
  2. Time Deposit Account
  3. Public Provident Fund Account (15 year)
  4. National Savings Certificate (VIII issue)
  5. Senior Citizen Savings Scheme

Mutual Fund

Being covered under the Section 80 C of the I. T. Act of India, this type of investment plan helps in a total exemption of INR. 100, 000. The entire tenure of such a scheme varies from 3 years to 5 years. Equity Linked Saving Scheme is considered to be one of the best tax saving mutual funds. More on Mutual Funds

Tax Saving Options in Public Sectors Banks

Fixed deposits are among the most popular tax saving options in most of the public sector banks. Besides that, some of the public sector banks like the State Bank of India, Allahabad Bank, Punjab National Bank and many more offers some other tax saving options like P. P. F., mutual funds and infrastructure bonds etc. Another unique bond, which helps to save tax payments, is 6.5 % Savings Bonds, 2003 by R. B. I. (Reserve Bank of India). This bond's tenure is for 5 years with an annual interest rate of 6.5 %.

Tax Saving Options in Private Sectors Banks


The private sector banks in India like ICICI Bank, HDFC Bank, City Union Bank etc. offer varied tax saving options to the country's citizens. To name a few of them are fixed deposits, mutual funds, life insurances, infrastructure bonds, recurring deposits and many more.

2012 Income Tax Calculator



Last Updated on 6/19/2015