DO YOU REALLY NEED TO SAVE TAX?

Do you often find yourself wondering if you are doing all you can to save as much on tax as you can? Fret not, you aren’t alone. Every year, taxpayers are on the lookout for the best tax-saving investments that can help lower their tax outgo. However, there are chances you might not even need to invest in tax-saving investments in the first place. Here’s why:

Tax saving investments just downsize your taxable income

Tax saving investments are useful only if one has a huge, sizeable taxable income. Typically, an investor must look for tax-saving investments if their cost to company (CTC) is greater than or equal to 5 lacs per annum.

Your whole salary is not taxable

Several investors are unaware of the fact that many CTC components of their salary are not taxable. Some of these components are:

  1. House Rent Allowance (HRA): There are some rules applicable but generally 90% of the rent you pay is exempt from taxable income
  2. PF (provident fund) employer contribution
  3. All salaried employees enjoy a standard deduction of Rs50,000 from their salary

Components of your salary that can help you with a tax break

An employee’s contribution towards EPF (Employee Provident Fund) is included in the Section 80C deduction of Rs1.5 lac per annum.

Existing commitments that couldlessen your taxable income

Following are some of the instances that are included in the Section 80C tax deduction of Rs 1.5 lac p.a.

  1. Principal repayment of home loan
  2. Payment of tuition fee for a maximum of 2 children
  3. In case of a self-occupied home, home loan interest payments of up to Rs2 lacs
  4. Premiums paid towards life insurance

How can you further save on taxes?

Even after considering the above parameters, if your income is still taxable, you can choose to invest in several types of tax-saving investments according to your investment portfolio. There are several types of Section 80C investments available to an investor, such as, Public Provident Fund (PPF), National Savings Certificate (NSC), Bank Fixed Deposits (FD), ELSS funds, etc.

Among all the tax saving investments, ELSS tax saving mutual funds enjoy the lowest lock-in tenure of merely three years, as opposed to 5 years and 15 years lock-in period by other tax saving investments. These tax saving mutual funds provide the dual benefits of capital appreciation and tax-saving abilities to investor. Historically, ELSS funds have offered double-digit returns when invested for a prolonged duration. This is because these mutual funds invest most of their portfolio, at least 80% of their assets in equity and equity-related assets.

However, you must choose an investment option that best aligns with your investment portfolio. In the quest to find a tax-saving investment option in a hurry, an investor often makes all ill decision. Investors must be wary that instead of just looking for tax-saving abilities, their investments must be able to grow their wealth as well. Before zeroing out on different types of investment, they must consider several factors such as lock-in tenure, expected rate of returns, liquidity, safety, etc. Happy investing!

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