While tax-saving is inevitable and important for the welfare of a country and its people, there are strategies you can use to protect your income from taxes. Knowing about these strategies will help you reduce your tax burden.
What is Tax?
The term “tax” may also refer to indirect taxes, which are levied on consumption and production amounts of goods or services paid for by a consumer to a supplier, such as sales taxes (VAT), excise taxes,
and customs duties, and other forms of indirect taxation. In contrast, direct taxes are levied on the income earned by individuals and businesses from business activities within a jurisdiction
How do Tax-savings?
Tax-saving mutual funds are a great way to save tax. You can invest in these funds for long-term capital gains tax exemption. These funds provide both regular income as well as capital appreciation. They are also known for their low cost of operation and better returns than bank deposits.
National Pension Schemes
National Pension Scheme (NPS) offers a monthly pension of up to Rs 1,50,000 per annum. The NPS is one of the best ways to save tax as it provides an attractive opportunity to own your retirement savings without paying any fees or charges. There are many schemes available under NPS including Government Provident Fund (GPF), Public Provident Fund (PPF), Senior Citizen’s Deposit Linked Insurance Scheme (SGLIS), and Special Deposit Linked Insurance Scheme (SDLIS).
Tax-Saving Investments Under Section 80C
Section 80C of the Income Tax Act, 1961 provides tax exemption to certain types of investments. These include:
1. Money market instruments
2. Debt securities issued by a resident company or partnership
3. Government securities
4. Deposits with bank/Building and Finance Corporation/National Housing Bank/National Insurance Company/State Insurance Corporation/Life Insurance Corporation/Health Insurance Corporation and their subsidiaries, etc.
Public Provident Fund (PPF)
PPF is a popular long-term tax-saving in investments scheme, which incorporates the feature of tax-saving investments in order to help the investors to create a financial cushion post-retirement. The PPF interest is taxable at the time of withdrawal. However, if the funds are kept in the corpus for a period of a minimum of five years and invested in FDs, one can claim an exemption from income tax on this interest earned by investing in PPF.
PPF has no lock-in period, which means that investors can withdraw their money anytime they want with no penalty. This scheme also offers tax benefits and is beneficial for those who have an irregular income as it does not require any minimum income requirements.
How to Plan the Tax-Savings Investments?
Tax planning is a long-term process. You need to save money for a long time and invest in the right way or else it becomes difficult to manage your tax liability in the future.
Tax-saving investments are those which are not taxed at the time of purchase but will be taxable when sold. They need to be purchased at the right time so that they can be sold before they turn into taxable instruments.
The most important aspect of tax-saving investments is that they should be held for a long period of time so that their value increases over time, making them more valuable when you sell them.
Conclusion
So now you have a government official determining the tax laws, deciding what percentage of the income you should pay based on his/her understanding of the law. You pay your taxes and the government uses the money that they collect to create better infrastructure, schools, and roads, and improve the quality of life of its people. You’ll have to check if there are any tax-free zones in your country as well.