Tax-saving ideas: Particularly for individuals in higher income tax brackets, the taxability of investment returns becomes pivotal

Which investment is 100% tax-free: 3 tax-saving investment options for tax-free income Taxable returns are added to your income and subject to higher tax rates

The deadline for tax savings for the current fiscal year is approaching, ending on March 31, 2024. If you intend to stick to the existing tax structure, it's crucial to thoroughly evaluate all available investment options, weighing their advantages and disadvantages. Factors to consider include lock-in periods, conditions for premature withdrawal, taxation on interest earnings, and maturity amounts, among others. Particularly for individuals in higher income tax brackets, the taxability of investment returns becomes pivotal. Taxable returns are added to your income and subject to higher tax rates.

Your complete tax-saving guide

Therefore, investments offering tax-free returns can significantly enhance your post-tax yield.
In the fiscal year 2023-24, salaried individuals have the option to opt for either the old tax regime or the new tax regime. Under the old tax regime, individuals can avail themselves of tax deductions and exemptions, whereas the new tax regime provides lower tax rates but fewer deductions and exemptions. It's crucial for salaried individuals to compare their final tax liabilities under both regimes before making a decision. If the old tax regime proves more beneficial, it's equally important to select the appropriate tax-saving options.

Given below are four tax-saving investment options that help you not only save income tax but also earn returns on which zero tax is payable.

1. Public Provident Fund (PPF)

Under Section 80C, individuals can reduce their taxable income by investing in the Public Provident Fund (PPF). This scheme falls under the "exempt-exempt-exempt" (EEE) category. Essentially, this implies that investors can claim deductions on their invested amount, and they are not liable to pay tax on the interest earned or the maturity amount. Additionally, in terms of safety, the PPF scheme is considered highly secure as it carries a sovereign guarantee.

The central government revises the PPF's interest rate every quarter, i.e., three months. For the quarter ending on June 30, 2024, the PPF is offering an interest rate of 7.1% per annum.

Also read: Why the Public Provident Fund is a safe option to save tax; 5 things to know

The PPF account is subject to a lock-in period of 15 years, beginning from the end of the financial year in which the investment is made. During the third to sixth financial years after opening the account, individuals have the option to avail themselves of a loan facility. Premature withdrawal is permitted from the seventh financial year onwards, subject to specific conditions. Additionally, under certain conditions, individuals can opt for premature closure of their PPF account.

A PPF can be opened either with a post office or a bank. An individual can open only one PPF account in their name. The minimum and maximum investment is Rs 500 and Rs 1.5 lakh, respectively, in a financial year.

2. Sukanya Samriddhi Yojana (SSY)

The Sukanya Samriddhi Yojana (SSY) was introduced under the government's "Beti Bachao, Beti Padhao" scheme. This is a deposit scheme for girl children. It allows the parents to invest for the education or marriage of a girl child and at the same time claim income tax benefit. Just like PPF, the Sukanya Samriddhi Yojana account also has EEE tax status. Hence, the amount invested, interest earned and the maturity amount are exempted from tax.

The SSY also comes with a sovereign guarantee. Hence, it has the highest safety standard. The government reviews the interest rate of this small savings scheme every quarter. Currently, for the quarter ending June 30, 2024, the scheme offers an interest rate of 8.2%.

The scheme has a lock-in period of 21 years from the date of opening of the account. However, premature withdrawal is allowed subject to certain conditions.

A Sukanya Samriddhi Yojana account can be initiated by a guardian in the name of a girl child, provided the girl is under 10 years of age. The account can be established at either a bank or a post office. Contributions to the account are subject to a minimum of Rs 250 and a maximum of Rs 1.5 lakh per financial year. The guardian oversees the account until the girl reaches 18 years of age.


3. Employees Provident Fund (EPF) and Voluntary Provident Fund (VPF)

Salaried individuals enrolled in the Employees' Provident Fund (EPF) system are required to allocate 12% of their salary toward their EPF account, with their employer making a corresponding contribution. The employee's contribution to the EPF is eligible for a deduction under Section 80C of the Income Tax Act. Should an individual wish to make supplementary contributions beyond the mandated 12%, they can choose to contribute to the Voluntary Provident Fund (VPF). The regulations governing both EPF and VPF contributions are identical.

The EPF scheme is managed by the government. Hence, it offers the highest safety.

The EPF interest rate for 2023-24 has been set at 8.25%.

The scheme imposes a lock-in period until the individual reaches retirement age. However, it does permit premature withdrawals under specific circumstances, such as for higher education expenses, marriage, medical treatment, among other qualifying situations.

The EPF scheme enjoys an EEE (Exempt-Exempt-Exempt) tax status, subject to specific conditions. However, starting from the financial year 2021-22, if an employee's contributions to EPF and Voluntary Provident Fund (VPF) accounts surpass Rs 2.5 lakh in a fiscal year, the interest earned on the excess amount becomes taxable. Additionally, as of the fiscal year 2020-21, if the employer's combined contributions to EPF, National Pension System (NPS), and superannuation funds exceed Rs 7.5 lakh annually, the surplus amount is taxable in the hands of the individual recipient. Any interest, dividends, etc., earned on these excess contributions are also subject to taxation. Nevertheless, the maturity amount of the EPF scheme remains tax-exempt.

Hence, one can say that as long as the employee's and employer's contribution limits are not breached, the EPF has EEE tax status.



This story originally appeared on: India Times - Author:Faqs of Insurances