The process of getting a refund back from the Income Tax Department is in itself a very tedious...
Every tax payer is confronted with the mammoth task of selecting a smart tax saving option or an optimum tax saving plan. Most tax payers think about designing an optimum plan to their taxes but few of them end up designing an optimum plan and able to execute to reduce their tax liability. The reasons for not being able to devise an optimum tax saving plan can be lack of right knowledge or information and struggles in finding the best possible solution.
This article talks about 7 best tax saving options for a taxpayer for the assessment year 2022-23.
Following are the 7 smart tax saving options for the Financial Year 2022-23 available to a taxpayer:
One of the smartest tax saving option is the Insurance. Almost everyone agrees that insurance is taken by a taxpayer with twin objectives of investment and savings. The primary purpose of insurance plan is to ensure financial security in case of any eventuality. Insurance buyers also purchase it because it provides a tax-free lump sum amount once it attains maturity.
A taxpayer on purchasing a life insurance policy is able to claim tax benefits which the government offers. As per section 80C of the Income Tax Act, 1961, tax payer can claim a deduction up to Rupees 1.5 lakhs against the premium paid towards for purchasing a life insurance policy. Another benefit it offers is that on maturity, the corpus due is tax-free.
Another popular tax saving option is the tax savings fixed deposits which is not only counted among the most popular tax saving options but also considered as a safe investment option. The reason why it is a tax saving plan is because of the availability of deductions under section 80C while calculated the taxable income. However, such tax saving fixed deposit schemes usually have a minimum lock-in period of 5 years.
Another tax saving option floated by the Government of India itself is called the National Savings Certificate (NSC) which is actually a fixed income investment scheme. This scheme is usually meant for the small and middle-income investors to invest and earn attractive returns. The reason why it is smart tax saving option is the fact that it has a relatively low-risk investment where the investors can invest according to their income profile and their investment habits.
The government also offers deduction under section 80G of the Income Tax Act, 1961 up to Rupees 1.50 lakh.
Investments in Public Provident Fund (PPF) scheme has been an option which is very popular among the investors for the reason that PPF falls in the exempt category and the flexibility of opening such account both with the banks and post offices.
Similar to the National Saving Certificate scheme, PPF scheme also offers a deduction to the tune of Rupees 1.5 lakhs under section 80C of the Income Tax Act, 1961 for the amount invested in the fund during the financial year. Further, since PPF falls under the exempt category, therefore the interest and maturity amount are exempted from tax. Generally, PPF account has a lock-in period of 15 years.
A taxpayer can claim tax benefits up to Rupees 25,000 for investing in health insurance plans. The premium paid by the taxpayer in relation to the policy covering himself, spouse and dependent children can be claimed under Section 80D of the Income Tax Act, 1961.
Another tax saving option that is gaining popularity is the National Pension System (NPS). The benefits of NPS are available to both the government employees and private employees. It helps them to build a corpus for their post-retirement needs and at the same time maintain regular monthly income. It has a lock-in period until the taxpayer reached the age of 60 years.
As per section 80CCD, a taxpayer can claim deduction up to Rupees 1.5 lakh. A new sub-section 1B has been introduced offering extra deduction up to Rupees 50,000 for contributions made by individual taxpayers towards the NPS.
Similar to life insurance, ELSS also offers the taxpayer tax deduction up to Rupees 1.5 lakh under section 80C of the Income Tax Act, 1961. Those taxpayers who are not averse to taking calculated risks can opt for investment under ELSS mutual funds. These mutual funds invest 60 percent of their investible funds in equity and equity-linked instruments.
Dual benefits are attached with the ELSS funds such as appreciation of capital and tax-savings at the same time. These characteristics make ELSS makes it an attractive tax saving among the taxpayers.
One of the biggest mistakes that the taxpayers commit is they focus more on selecting the best tax saving option and ignore to take into account the best suited investment option suitable to their needs. The goal should be to invest in an investment option best suited to their needs and accordingly a tax saving option should be selected. A taxpayer should ideally start tax planning for best tax saving schemes at the beginning of the financial year. This practice ensures that the taxpayer does not pay extra taxes and save tax all year long.
Read Our Article: Best Tax Saving Options Beyond Section 80C