Demystifying Tax-Efficient Investments: A Beginner’s Handbook For 2024
Introduction
The new financial year is upon us. One key piece of advice from experts at the start of the financial year is to plan for taxes. If done from the beginning, it helps in making the right choices and not making rushed decisions, especially during the last quarter. This blog highlights the tax-efficient investing strategies that you can utilise to lower your tax liability.
Key Things to Know for Tax-efficient Investing
There are certain things you should know to make tax-efficient investment decisions. These include:
- New and Old Tax Regime
First things first. Currently, there are two tax regimes in India — new and old. While the new regime has more tax slabs, albeit with lower rates, the old regime has fewer slabs with higher rates. That said, several exemptions and deductions in the old tax regime are not available in the new regime.
Before making tax-saving investments, you need to determine which regime will better help you save taxes. Do the numbers game carefully to avoid surprises later. If you find it difficult, seek help from a professional tax consultant or a chartered accountant.
- Available Tax-saving Investment Options
Next, you need to know the various tax-saving investment options you have at your disposal. Various sections under the Income Tax Act allow you to invest money and lower your tax outgo. Section 80C is among the most popular among them. Investments up to Rs 1.5 lakhs in a financial year are eligible for exemption under this section. Some popular instruments listed under it are as follows:
- Life Insurance Premium
Premiums paid towards life insurance plans are eligible for tax exemption under this section. If you pay premiums towards a term plan, endowment plan, unit-linked insurance plan (ULIP) or a money-back policy, you can claim a deduction for it.
- Public Provident Fund (PPF)
PPF is a government-backed scheme that enjoys an EEE (exempt, exempt, exempt) status. This means the money invested, interest earned, and maturity amount are tax-free. PPF comes with a 15-year lock-in period and helps you build a corpus for long-term goals such as children’s higher education, retirement, etc.
- Equity-linked Savings Scheme (ELSS)
ELSS is another tax-efficient option under section 80C. ELSS has a 3-year lock-in period, and investments in it qualify for tax exemption under section 80C.
- National Pension System (NPS)
The NPS is a government-backed scheme that allows you to build a corpus for retirement. While NPS allows tax exemption of up to Rs 1.5 lakhs every financial year, you can further claim a deduction of Rs 50,000 up and above Rs 1.5 lakhs under section 80 CCD (1B). That’s not all. 10% of the basic salary contributed by your employer towards your NPS account is also eligible for tax exemption.
- Tax-saving Fixed Deposits
Investment in tax-saving FDs also qualifies for tax exemption under section 80C. These deposits come with a 5-year lock-in period.
1. Tax-saving Options Other Than Section 80C
Apart from Section 80C, various other investments qualify for tax deductions under different sections of the Income Tax Act (see table):
| Section 80D | Medical insurance premiums |
|---|---|
| Section 80EE | Interest on home loan |
| Section 80G | Charitable organisation donations |
| Section 80TTA | Interest earned on savings account |
2. Keeping Long-term Capital Gains From Equities and Equity-oriented Mutual Funds Under Rs 1 Lakh
If you invest in equities or equity-oriented mutual funds, you must pay a 10% tax on gains above Rs 1 lakh in a fiscal as long-term capital gains (LTCG) tax. However, if the gains are up to Rs 1 lakh, you need not pay any tax on it. Therefore, review your equity portfolio regularly and make the necessary adjustments to ensure gains are not above Rs 1 lakh.
Importance of Tax-efficient Investments
Making tax-efficient investing helps you:
- Bring down your tax liability
- Ensure your investments align with your goals
- Not commit to a product that you don’t require
- Utilise the money saved on fulfilling other commitments
Wrapping it Up
Instead of making tax-saving investments in the final quarter of the financial year, it’s better to do it now. Doing it now allows you to evaluate your preferences and invest accordingly. It also helps you gauge your financial situation better and make intelligent decisions.
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