Taxes literally mean Lagaan in Hindi. We all pay them in various instances of our life. Our restaurant bills ask for service tax. The guy at the tollbooth asks for toll tax. We get our salaries after deducting taxes. We are constantly paying taxes but we have a lot of unanswered questions. Are they penalties? Are they hidden costs? Who is liable to pay them? Who receives them and what do they do with that money? We need to understand these points before we get into what are the tax saving options to explore.
What are taxes?
Taxes are the compulsory fees charged by the Government of a country from its individual and corporate citizens for rendering the service of governing, protecting and supporting their freedom and way of life.
Taxes are a Government's most important tool for redistribution of wealth. Our tax structures are made in such a way that the rich get taxed more while the poor get exempted, so that only the ones who can afford to pay taxes are charged. The sums thus collected are then used for welfare projects such as infrastructure, disaster rescue efforts, finance for small businesses and farmers, etc.
Paying taxes helps in
1.Income for running the Government:
The taxes that we pay are used for remunerating all the government representatives, officers, administrators, and employees and for all other expenses related to the running of the government machinery.
2.Public utilities and amenities:
Construction of roads, over bridges, highways, free education, free medication, job opportunities, etc. can be planned and executed more efficiently if we pay our taxes honestly.
3.Free Education and Medical care:
The taxes that we pay are what enable the lesser-privileged many to get a good education and healthcare that they cannot afford themselves.
Your taxes not only support the internal security forces but also the national security personnel.
Paying taxes creates a sense of social responsibility in all citizens. When people pay taxes the sense that they are the financiers for social amenities also makes them responsible citizens.
So, how to reduce tax?
You need to devise a robust tax saving plan to effectively save taxes. And each one’s tax plan differs from the other as the income and investment goals vary. So you need to choose a tax saving option that suits your need.
Devising a brilliant tax saving plan is both rewarding and challenging. It’s challenging because one has to choose from multiple options and one wrong choice can last you at least for 3-5 hours.
Please note here that these options are not based on ranking, hence, they don’t follow any sequence. While choosing your tax saving option take into account your requirements and financial goals.
Tax saving options:
Equity Linked Savings Scheme or ELSS funds have great potential, high liquidity and transparency. Their lock-in period for three years is the shortest for any Section 80C option. Go for the direct plan of the fund. The charges are lower, hence, the returns are higher.
Tax Free Bonds
Tax free bonds can be used to reduce the tax liability of an individual. These are the bonds where the interest received is totally exempted from tax as per the Section 10. Also, the principal amount that gets invested in tax free bonds cannot be claimed as the deduction from the bondholder’s total income. Tax Free bonds are mostly issued by entities that are backed by the government and hence the risk involved is less.
PPF AND VPF
This is a good option for the conservative investor who’s fine with earning less, as long as the earnings are assured. And the best part is that this amount goes from your salary, so you don’t even realise investing in it.
ULIPs are now online and are ultra cheap. They’re also extremely flexible. If you’re a ULIP investor, you can switch your amount from equity to debt, and vice versa. And there are no taxes on the gains made from the switching because insurance plans are exempted under Section 10 (10d).
Then there are several options under Pension plans, Insurance Plans, Bank FDs and NSCs that offer benefits for different kinds of people as the perfect tax saving option. The Sukanya Samriddhi Scheme for the girl child is a great way to save tax. However, it is open only to girls below 10. If your daughter is 10 or below, this is the right time to invest in this scheme. It is definitely a better option than a simple savings account and sometimes, even child plans.
So, based on your income and goal, scan through various tax saving options and choose the ones that best suit you.