How to Select the Right Tax Savings Plan for You

Tax saving is an important aspect of financial planning. And efficient tax planning is not just about saving the tax payment but also about choosing the right investment options that provide tax-free returns. Read on to know more about tips for choosing the right tax-saving plan.

Every year, the tax-saving season begins from 1st April for both salaried and non-salaried tax payers. As a smart investor, you must evaluate your investment options and should invest in specific investment schemes that allow you to get tax benefits as well as generate tax-free returns.

If the income you get from your investments is taxable, it would significantly reduce your overall returns in the long-run as the taxes will eat into your returns. But, fortunately there are many smart ways to invest and get maximum tax-savings. Most people in India don’t think about tax-saving till the end of the financial year and tend to invest in random schemes. But, such an approach can be detrimental to your finances and derail your whole tax-saving endeavour.

The experts recommend that the best way to get maximum tax-saving is to start planning for it at the start of the year. This will help you get enough time to plan your investment, choose the best savings plan and get maximum returns.

While choosing the right tax-saving investment plan, you must consider vital factors like safety, liquidity, and returns. Also, it is critical to have a thorough understanding of how the returns you get will be taxed. If the returns are taxable, then the scope of building a large corpus will be constrained.

Now that you know how to select the right tax-savings plan, let us look at some of the best plans that you can invest in.

NPS – National Pension System

National Pension System is a voluntary contribution based investment-cum-savings scheme that is backed by the government of India. In NPS, you make a periodic contribution in your NPS account, and the amount is invested in various mutual fund schemes based on your financial goals and risk-taking capacity to generate inflation-adjusted returns.

In terms of tax-savings, the NPS is one of the few investment schemes in India that is classified as an Exempt-Exempt-Exempt investment. The contribution you make towards your NPS account is exempt under Section 80C of the IT Act. Under Section 80CCD (1B), you get an additional deduction up to Rs. 50,000. And, the pay-out you get on maturity is tax-free.

ULIP – Unit Linked Insurance Plan

ULIPs are another excelling tax-saving investment that not only allows you to reduce your tax outgo but also gives you high-returns in the long-run. While ULIP is essentially a life insurance policy, a part of the premium you pay is invested in the money market to generate returns. You have the flexibility to choose the funds you want to invest in based on your financial goals.

Additionally, the premium you pay is eligible for tax benefit under Section 80C of the IT Act to a maximum limit of Rs. 1.5 lakhs in a financial year. Also, the returns you get from ULIP are tax-free under section 10(10D).

NSC – National Savings Certificate

While both ULIPs and NPS offer valuable returns, they also have a risk element as the returns are market-based. So, if you are looking for a risk-averse investment opportunity and get tax-savings at the same, investment in NSC would perfectly suit your needs.

It is a fixed income scheme, which you can open with any post-office. Just like the bank FD, and PPF, NSC offer guaranteed returns on investment. The amount you invest in NSC is eligible for tax benefit up to Rs. 1.5 lakhs under Section 80C of the IT Act. Additionally, the interest earned on the certificate is tax-free.

Final Word

Now that you know about the best tax-savings investment schemes, choose the one that best suits your specific needs and goals.