Invest in tax-saving instruments
This is one of the ways to grow your wealth and save taxes under Section 80C of the Income Tax Act. These options are especially designed to encourage savings and long-term financial planning . Here's how you can consider this:
ELSS (Equity-linked savings scheme)
ELSS mutual funds are one of the most popular choices for tax-saving investments. ELSS has a lock-in period of 3 years. You can claim a tax deduction of up to ₹1.5 lakh under Section 80C .1
PPF (Public provident fund)
This is a government-backed savings scheme that has a tenure of 15 years. The returns here are tax-free, and the interest rate is revised quarterly by the government.2 PPF is an option for risk-averse investors seeking long-term and stable growth.
NPS (National Pension System)
NPS is a retirement planning option. It comes with tax benefits under Sections 80CCD (1), 80CCD (1B), and 80CCD (2).3 Herein, you can claim an additional ₹50,000 deduction under Section 80CCD(1B).4 Your wealth grows over time, and you can choose between equity, corporate debt, government bonds and AIF or Alternate Investment Funds18.
Use insurance policies strategically.
Next up on “how to grow wealth while saving taxes” is through insurance. Insurance can be for both protection and for saving taxes while protecting your wealth. Here are two key types of insurance to focus on:
Health insurance (Section 80D)
5The premiums that you pay here qualify for deductions. Individuals can claim up to ₹25000 for themselves and their families. If it is for senior citizens, the amount increases to ₹50,000.
Life insurance (Section 80C and 10(10D))
Life insurance premiums qualify for deductions under Sections 80C and 80D of the Income Tax Act (under old tax regime).6 Plans like Unit Linked Insurance Plans (ULIPs) are a life insurance plan which offer a combination of life insurance along with investments which is subject to market risks. Premiums up to ₹1.5 lakhs paid in a financial year can be tax exempted under section 80C under the Old Tax Regime.
The maturity amount and death benefits are tax-free under Section 10(10D), provided certain conditions are met.
- For Unit Linked Insurance Plans bought after the 1st of February 2021¹⁴, the proceeds are tax-free only for aggregate annualised premiums less than ₹2.5 lakhs in the entire policy year, else the regular rate of 12.5%¹⁵ of Long Term Capital Gain taxation would apply if held for 1 year as per the Budget 202519,*.
- For traditional policies (other than ULIPs) bought after the 1st of April, 2023, total premiums exceeding ₹5 lakh in a year will be taxable, except in cases where the insured person has passed away¹⁶.
Real estate investments.
Real estate is an asset that can help you save on taxes. It is often considered to be an appreciating asset by many. This means that its value will only increase over time. Here’s how to grow wealth while saving taxes:
Principal repayment (Section 80C):
The principal amount of your home loan qualifies for a deduction of up to ₹1.5 lakh under Section 80C. 7
Interest repayment (Section 24):
Here, you can claim a deduction of up to ₹2 lakh on the interest that you’ve paid on your home loan.8
Additional benefits for first-time buyers:
Under Section 80EEA, first-time homebuyers can claim an additional ₹1.5 lakh deduction on interest paid. However, this is again subject to certain conditions.9
Look for tax-free income sources
Several income streams in India are exempt from taxes. Start focusing on these options. For example, try:
Farm income:
Farm income is completely tax-free in India under Section 10(1).10 This is what makes it an excellent option for individuals who are interested/involved in farming or related activities.
Savings account interest (Section 80TTA):
In India, the interest that you earn on savings accounts is tax-free (₹25,000 per year).11
Dividends from investments:
Earlier, dividends from mutual funds and stocks were tax-free. However, now, they are subject to taxes.12 However, dividend-paying investments can still provide a steady source of income with lower tax implications.
LTCG (long-term capital gains) exemptions:
LTCG on equity investments is tax-free up to ₹1.25 lakh per year.13 However, you can enjoy tax-free growth on your investments only if you invest smartly here.
Take advantage of employer benefits
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Your salary structure plays an extremely solid role in tax savings. Many companies offer benefits that reduce your taxable income while allowing you to grow wealth:
LTA (leave travel allowance):
LTA allows you to claim travel expenses for yourself as well as your family (as a deduction).
HRA (house rent allowance):
If you live in a rented house, you can claim HRA as a deduction. The amount will depend on your salary, rent paid, and city of residence.
Meal vouchers and reimbursements:
Employers very often offer certain tax-saving perks like transport reimbursement, meal vouchers, and medical allowances.
Provident fund contributions:
Contributions made to the EPF (employee provident fund) by you and your employer are exempt from taxes up to a certain limit. The accumulated amount will grow over time, thereby building a substantial safety net for your future.
Wrap up
Building wealth while being aware of and utilizing tax deductions requires a very smart and informed approach. All you need to do is identify opportunities like making calculative expenses, and integrating tax planning with long-term financial goals etc. When done correctly, this strategy doesn’t just save you money but grows your wealth . Remember, the earlier you start, the greater your wealth grows over time!
FAQs
How to reduce income tax liabilities ?
There are certain exemptions and deductions that can reduce your tax liabilities .
For example – Under section 80 C in the old regime there are deductions available on premiums paid towards life insurance, the Sukanya Samriddhi Yojana , National Savings Certificate etc subject to provisions of the Income Tax Act. Additional deductions are also available under different sections of the Income Tax Act. It is advisable to seek guidance from a tax consultant before proceeding. 22
How can I invest 1.5 lakh to save tax?
21There are several tax-saving options that you can choose from. Life insurance premiums of up to ₹1.5 lakhs are exempted under Section 80C, and others.
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