Guide to Tax Planning

Tax Planning 101 – The Beginner’s Guide.

Budget season is upon us. In a couple of days, Finance Minister Smt. Nirmala Sitharaman will present the Union Budget for 2024, where she will introduce new schemes and modify existing ones. As always, we look forward to increased tax deduction limits and ways to optimise our investments while reducing our tax outgo. With the budget announcement in February and salary revisions in April, a whole new crop of employees shall move from the no-tax to taxable salary bracket. For this new lot of tax payers, we’ve created this article to help familiarize them with the different investment instruments in India that can help them leverage tax benefits.

Financial Planning For New Tax Payers – Investment Instruments and Tax Saving Strategies To Know

As a newbie tax payer, you will be surprised to know that you can invest in various schemes and enjoy tax benefits on investments. The most popular tax-saving investment instruments in India include:

  1. Public Provident Fund (PPF)

    One of India’s favourite tax-saving instruments, Public Provident Fund (PPF) offers annual tax deduction benefits of up to ₹150,000 under Section 80C of the Income Tax Act of India. PPF is categorized as an Exempt, Exempt, Exempt or EEE investment, i.e., you do not have to pay tax on the amount invested, returns accrued, and maturity amount. This instrument is ideal for creating a retirement corpus. You can invest as little as ₹500 per annum in PPF to keep your account active.

  2. Investment Period: 15 years followed by blocks of 5 years into perpetuity.

  3. Employee Provident Fund (EPF)

    Employee Provident Fund (EPF) is another Section 80C instrument that makes you eligible for annual tax deduction benefits of ₹150,000. Typically, your employer opens your EPF account and deposits up to 12% of your basic monthly salary, plus an equal amount contribution from their side into this account. You may withdraw the funds deposited into this account when you are unemployed or upon retirement. You can even transfer the EPF account to a new employer when you change jobs.

  4. Investment Period: Until you retire or resign, whichever comes first.

  5. National Pension Scheme

    Another voluntary investment scheme designed to help create a retirement corpus, National Pension Scheme (NPS) has become incredibly popular in the last few years. Under this scheme, you can claim tax deductions of up to 10% of your salary (basic and DA), under Section 80CCD (1) within the overall 80C annual limit of ₹150,000. Moreover, you can claim an additional deduction of up to ₹50,000 per annum under Section 80CCD (1B), over and above the deduction permitted under Section 80CCD (1).

  6. Investment Period: From the age of 18, until retirement or up to 70 years.

  7. Equity Linked Savings Scheme (ELSS)

    Like most investment schemes in this list, ELSS also falls under Section 80C, allowing annual tax deduction benefits of ₹150,000. However, unlike other instruments that help with wealth creation in India, ELSS is a mutual fund offering with no upper limit on the amount you can invest. Like PPF, ELSS is also classified as an EEE instrument, so long as your capital gains do not exceed ₹100,000 per annum. If they do, you must pay a Long-Term Capital Gains (LTCG) Tax of 10% on gains exceeding ₹100,000.

  8. Investment Period: 3 years from the date of investment

  9. Life Insurance

    If you are your family’s sole breadwinner, and want to ensure their financial security in your absence, you must invest in Life Insurance. Once again, you can claim annual tax deduction benefits of ₹150,000 under Section 80 C. The premium you pay to enjoy life insurance benefits makes you eligible for tax deductions and the deduction applies irrespective of the type of life insurance policy you choose. However, you must purchase an IRDAI-approved life insurance policy to qualify for tax deductions.

  10. Investment Period: 10 to 30 years based on the policy type, including up to 100 years of age.

  11. Health Insurance

    Last, but by no means the least, Health Insurance investments also qualify for tax breaks. Under Section 80D, you can claim annual tax deductions benefits of ₹25,000 up to ₹100,000 on purchasing health insurance in India for yourself, spouse, children, and dependent parents. The maximum deduction you can claim depends on the ages of the insured parties. Plus, you can claim up to ₹5000 in tax benefits on preventive health check-ups for yourself and your family under the total ₹25,000 to ₹100,000 limit.

  12. Investment Period: Up to the age of 65 years, 70 years, and 90 years, depending on the chosen policy.

Things to Remember
  • You can invest in either one or as many Section 80C (and sub-sections) tax-saving instruments.
  • The maximum annual tax deduction limit across these instruments may not exceed ₹150,000.
  • You can claim the tax deduction benefits only if you choose the old tax regime.
  • You may invest in all instruments even if you opt for the new tax regime, but profits earned are taxable under Indian tax laws.
  • You can use tax calculators to check the more financially sensible option for you between the new and old tax regimes.
Final Word

With so many options and investment instruments in India and the various tax saving strategies that you can employ, it can be overwhelming to choose the right instruments for you. As a first-time tax payer, you can speak to an investment expert, discuss your specific requirements and then invest in instruments that best suit your requirements.

Disclaimer: The above information is indicative in nature. For more details on the risk factor, terms and conditions, please refer to the Sales Brochure and Policy Wordings carefully before concluding a sale.

Looking for the right policy?

Manage Your Policies at Fingertips

Avail Your Insurance Benefits on the go with SBI General Mobile App

Download the App Now

qr code
apple play storeplay store