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How to Save Tax with Savings Plan?

How to Save Tax with Savings Plan?
October 21, 2022

When you think about the future, what do you envision? Do you think about getting married to your soulmate, or perhaps you see yourself enjoying financial independence in your golden years? Whatever your dreams, there’s no denying that a savings plan can help you plan your finances to fulfil your aspirations. A guaranteed savings plan allows you to secure your future while helping you save on taxes in the present. Let’s learn how to save tax with a savings plan.

What is a Savings Plan?

A savings plan is a type of endowment plan. You pay premiums for a stipulated term and receive a lump sum payout on the plan’s maturity. Savings plans are non-participating, non-linked plans, making them a safe avenue for you to store and earn returns on your idle savings. Additionally, these policies offer life coverage to the policyholder, ensuring your family’s financial future remains secure even if something happens to you.

What Are Tax-Saving Plans?

Tax-saving plans are financial tools that allow you to claim certain benefits based on prevalent tax laws. Currently, the Income Tax Act of 1961# allows individuals to make deductions from their taxable income against certain investments or insurance products. Tax-saving plans include life insurance policies, Equity-Linked Saving Schemes (ELSS), fixed deposits, savings plans, bonds, and more.

Why Should I Opt for Tax-Saving Plans?

Tax-saving plans allow you to minimise your tax liabilities while helping you to build a corpus for your future goals.

How to Save Tax with the Income Tax Act

Let’s look at how you can save on taxes based on the Income Tax Act of 1961#:

  • Sections 80C, 80CCC, 80CCD (1)

Under these sections, individuals can claim a deduction of up to INR 1, 50,000 per year from their taxable income against a wide range of investment plans, including Unit-Linked Insurance Plans (ULIPs), pension plans, savings plans and other life insurance policies.

  • Section 80D

Individuals can avail deduction against medical insurance premium paid towards insurance on their health or their family subject to limit specified in sec. 80D

  • Section 24

You can claim deductions under this section against the interest paid towards your home loan.

  • Section 80G

You can claim deductions under this section against the money you donate to relief funds, charities and other social organisations.

  • Section 80TTA/TTB

Interest earned on deposit (other than time deposit) up to Rs.10,000/- is eligible for deduction under section 80TTA. For senior citizen’s, interest earned on deposits (including time deposit) up to Rs. 50,000/- is eligible for deduction under section 80TTB.

How is Tax Calculated?

Your tax gets calculated based on your total income for the year. You must pay a percentage of your earnings to the government. Every financial year, you can invest in various tax saving schemes to minimise your overall tax burden. To understand your taxable income, you must subtract all eligible deductions from your gross total income. You then arrive at your taxable income. As per the Union Budget, your taxable income falls under various tax brackets, based on which you must pay the required tax.

How Can Young Unmarried Taxpayers Save on Income Tax?

Most youngsters in their 20s and 30s don’t worry about tax planning or saving and investing for the future. By opting for a few prudent savings plans, they can grow their wealth while minimising their tax liability. Young unmarried taxpayers can start their tax-saving journey with a term plan. Although these plans don’t provide significant returns, they encourage a habit of saving while securing your family’s financial future. Term plans provide tax benefits up to INR 1, 50,000 per year. If you’re looking for higher returns, you can opt for a ULIP, which falls under the exempt-exempt-exempt subject to conditions in the tax laws. So, your premiums allow tax deductions, while the maturity and life insurance payout amounts can be exempt on satisfying the conditions given in the tax laws. .

Planning Tax-Savings for Single Income Couples

Families with only a single income must protect the family’s financial future. You can opt for a term plan or an investment-cum-insurance product like a ULIP to safeguard your family’s finances while also claiming tax deductions under Section 80C#. Additionally, you can claim a deduction against the fees you pay for your child’s education. If you opt for a loan to fund their higher education, you can claim a further deduction against interest payments under Section 80E.

Tax Planning for Double Income Households

If you and your spouse both earn, you can save INR 3, 00,000 on deductions against Section 80C of the Income Tax Act by purchasing insurance and savings plans. Additionally, making use of policies like ULIPs helps you build money to fulfil your future goals while safeguarding your family’s future.

Tax-Saving Schemes for Retired Individuals

Most retired individuals receive an income from their investments like retirement or annuity plans. You must find retirement options that allow you to save on taxes in your golden years, such as the Senior Citizen Savings Scheme. Additionally, you can use a ULIP to plan your retirement funds and enjoy tax-free income on the plan’s maturity, upon fulfilment of conditions provided in the tax laws.

Planning Taxes for Family Business Owners

Running a small enterprise could increase your taxes in the long run. You can benefit from tax exemptions by creating a Hindu Undivided Family (HUF) to reduce your overall taxation. Additionally, you can purchase health insurance policies or donate money to worthy causes to enjoy further deductions from your taxable income.

You must plan your finances well to safeguard your family’s future and save on taxes. Start your tax planning at the start of the financial year and identify policies that maximise your savings in the present while creating a significant corpus for your future. You can speak to a financial advisor to make the most of your earnings and safeguard your family’s financial future.

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#The customer is requested to seek tax advice from his/her Chartered Accountant or personal tax advisor with respect to his/her personal tax liabilities under the Income-tax law.

#The above stated tax benefits are subject to the provisions & conditions mentioned in the existing Income Tax Act, 1961. Tax Laws are also subject to change from time to time.