Tax saving involves utilizing various financial strategies and investment options to reduce the taxable income and thereby the overall tax liability. These strategies allow individuals and businesses to retain more of their earnings and invest in growth opportunities. Tax-saving instruments often offer deductions, exemptions, or credits under different sections of tax laws.
Ways of Saving Taxes
- Investments in Tax-Saving Instruments: Various investments such as Public Provident Fund (PPF), National Savings Certificate (NSC), and Tax-saving Fixed Deposits (FDs) qualify for tax deductions under Section 80C of the Income Tax Act.
- Insurance Premiums: Premiums paid for life insurance policies, health insurance (under Section 80D), and education loan interest (under Section 80E) can be claimed as deductions, reducing taxable income.
- Home Loan Interest: Under Section 24(b), interest paid on home loans for the purchase or construction of a house is eligible for a deduction up to a certain limit.
Equity-Linked Savings Scheme (ELSS) Mutual Funds
ELSS mutual funds are tax-saving investment options that offer the dual benefit of tax savings and potential wealth creation. They invest primarily in equities and related instruments.
- Tax Deduction: Investments in ELSS are eligible for a tax deduction of up to INR 1.5 lakh under Section 80C of the Income Tax Act.
- Lock-in Period: ELSS funds have a mandatory lock-in period of three years, which is the shortest among all tax-saving investment options under Section 80C.
- Growth Potential: As these funds invest in equity markets, they have the potential to generate higher returns compared to traditional tax-saving instruments. However, they also carry market risks.