Investments are a great way to increase your wealth substantially for a financially secure future. In a country like India, there are various options that you can advantage of to invest and grow your wealth. Each of these financial instruments functions differently, but they help in providing good returns on your investments.
However, a major concern for many people that deters them for investing is the tax they will be required to pay on their investments. There are many tax-saving instruments that you can take advantage of which if you intend on saving tax. Read on to know more about them and the types of ITR that you should know about.
Understanding the tax system
As you may be aware, tax gets applied to various sources of income. Examples such as investments, property, and deposits get taxed. To pay tax, you need to file an income tax return (ITR). In India, there are different types of ITR. They are:
- ITR 1
This applies to individuals whose income is below Rs.50 LPA. The sources of income under this ITR are salary, pension, investment, andif they are earning income from one property. .
- ITR 2
If your income is more than Rs.50 LPA from the sources mentioned in ITR, this ITR applies to you. Other sources of income considered are capital gains, owning more than 1 house, and any foreign source of income.
- ITR 3
Income from the sources that are mentioned in ITR 3 is applicable under ITR 3. If you own a business or are a partner in a company or firm, the income from that is also applicable under ITR 3.
- ITR 4
The same rules of ITR 1 apply in ITR 4, with the only difference being that the income range in this ITR is more than Rs.50 LPA.
- ITR 5
Private firms, companies that are limited liability partnership (LLP), and association of persons (AOP) are applicable under ITR 5.
- ITR 6
If a company does not claim any tax-exemption under Section 11 of the Income Tax Act, it can apply for ITR 6.
- ITR 7
If persons or companies that come under Section 139(A)/(4B)/(4C)/(4D) of the Income Tax Act, they can go for ITR 7.
Types of tax saving instruments
If you are looking for financial instruments that allow you to save tax, the following instruments can help you do that:
- Equity Linked Saving Scheme (ELSS)
This scheme is a type of mutual fund. When you invest in ELSS, your money is invested in equity funds, which provide good returns. However, do keep in mind that the equity market is volatile in nature and fluctuations could impact your returns. Under Section 80C of the Income Tax Act, ELSS are eligible for a tax deduction up to Rs.1.5 Lakhs.
- National Pension Scheme (NPS)
This scheme allows you to invest your money with your retirement in mind. The income that you earn from this can be used as a pension after you retire. As the money comes from income, you get a tax deduction of up to 10% of salary, i.e., basic pay plus dearness allowance under Section 80CCD (1) of the Income Tax Act. This deduction comes within the limit of Rs.1.5 Lakhs under Section 80CCE of the Income Tax Act.
- Life insurance policy
This policy ensures that your family is well compensated financially after your unfortunate demise during the policy term. When you purchase this policy, you are eligible for tax benefits on two aspects of the policy. The first is the premium, which is eligible for a tax deduction for a limit of up to Rs.1.5 Lakhs under Section 80C of the Income Tax Act. The second is the death benefit/maturity benefit, which is eligible for tax exemptions under Section 10(10D), under certain conditions.
- Unit Linked Insurance Plan (ULIP)
ULIPs are a type of life insurance policy that provides the dual benefit of investment and insurance under the same policy. As per the new tax regime, ULIPs purchased before or on 1st February 2021, the tax exemption on them would be limited to annual premium payments of up to Rs2.5 Lakhs under Section 10(10D). The same premium limit is applicable if you own multiple policies.
- Public Provident Fund (PPF)
PPF is one of the safest investment option that provides nominal returns for many people. This fund is preferred by salaried individuals who are looking to invest minimal amounts for a longer duration. Under Section 80C of the Income Tax Act, investments made up to Rs1.5 Lakhs are eligible for tax deduction.
- National Saving Certificates (NSC)
This is a type of fixed deposit scheme that you can avail at a post office. The returns are a bit low compared to the conventional FDs; however, as the money is invested in post office, the risk factor is quite low when it comes to the safety of your investment. Investments made up to Rs.1.5 Lakhs are eligible for tax deduction under Section 80C of the Income Tax Act.
These are the tax benefits that you can enjoy with these financial instruments. Do keep in mind that these benefits might change if the government implements any changes in rules. You can get in touch with your tax advisor to get a better idea about the changes between old and new tax regime and how it affects the tax, such as advance tax, that you pay. You can also use the income tax calculator to see how much tax you will have to pay based on your investments and income.