Effective tax planning and advice for optimised tax benefits

Finding ways to reduce taxes on your annual income can be an important tool to optimise your financial planning and wealth management. The benefits are twofold. Investing in tax-saving instruments allows for potential financial gain while mitigating your tax burden. If you are planning to reallocate your investments from taxable to tax-saving investments, this article will serve as a guide. However, tax planning can be a complicated process, and it might be beneficial to seek the advice of tax planners at a certain stage. 

An advantage of engaging an investment consultant is that tax planning is only one of the avenues in which your wealth is manageable. Receiving the expert advice of an investment consultant can also help manage your investment portfolio, insurance planning, debt management, and more. Efficient management of all these avenues can lead to better wealth management. Nonetheless, it is always important to be prepared, and so listed below are five of the most effective tax-saving instruments you can use for efficient tax planning.      

1. Government Schemes

There are numerous government schemes mandated under Section 80C of the Income Tax Act, of 1961. Under this section, an individual can save tax up to Rs 1.5 lakh by investing in one of the authorised government schemes. One example of this is Fixed Deposits - a route opted for by many. Another is Public Provident Funds - a low-risk, low-return investment effective for tax planning. Overall, there are many schemes and avenues to choose from, making government schemes a reliable option for tax-saving investments. 

2. Health and Life Insurance 

Making premium payments in life or health insurance ensures a certain amount of tax benefit. In the case of life insurance, an individual can avail of tax benefits up to Rs 1.5 lakh if the annual premium is less than 10% of the entire amount insured. Health insurance can play the dual role of saving medical expenses while shoring up tax benefits. You can avail of up to Rs 25000 for non-senior citizens and Rs 50000 for senior citizens. 

3. Gain Tax Benefits from A Home Loan 

If you avail of a home loan from a mandated government scheme or financial institution, you can avail of up to Rs 1.5 lakh tax benefits on your annual income. However, it should be noted that the rules and regulations have changed for those under the new tax regime implemented by the Indian Government in 2020-21. The old tax regime is still accessible, and consulting a tax advisor to understand which regime suits you best is recommended. The tax benefits of a home loan have been slightly diluted in the new tax regime; however, they are still available under the old regime.  

4. Invest in Retirement Fund Programs

Investing in pension retirement programs is a strong option on many fronts. Not only does it offer annual tax benefits, but it also sets up your financial security post-retirement. For example, the Government of India offers the National Pension Scheme. In this scheme, an individual can avail up to 10% tax benefit on annual income. Furthermore, it delivers returns from 12% to 14%, and the lock-in period lasts till retirement. One drawback to investing in a retirement fund is the low returns, so making it only one of the streams of tax-saving instruments in your planning is advisable. 

5. Equity Linked Savings Scheme

If you are looking for a slightly higher return, a smart option could be to invest in Equity Linked Savings Schemes. It is India's only mutual fund program under which an individual can receive tax benefits. Since investments under this scheme are primarily made in the stock market, they can carry a higher risk. Therefore, investing in this scheme only as a long-term investment is wiser since this balances out the risk quotient. Nevertheless, Equity Linked Savings Scheme is among the most profitable tax-saving instruments. 

Conclusion

These are some of the best tax savings instruments in the investment market today. These instruments can help you grow financially while saving on overall tax payments. While most options generate low returns, individuals can take the route of higher returns by investing in schemes such as the Equity Linked Savings Scheme. Consulting a tax advisor to understand the differences between the new and old tax regimes and which one would suit you better is highly recommended. Tax planners can play an extremely important role in offering you the most beneficial tax breaks while bringing you the highest returns.