Understanding the Tax Benefits of Savings Plans

Many people invest for long-term financial security, but they often overlook a crucial aspect that influences their investment returns – tax implications. Hence, this blog discusses the tax benefits of Savings Plans so you can strategically plan your investments for maximum tax-saving benefits. 

Being aware of tax implications can prevent you from overlooking or under-utilising the tax benefits provided under the Income Tax Act, enabling you to accumulate more tax-free savings. 

Overview of Tax Benefits

Types of Tax Benefits

If you’re investing in Savings Plans in India, you can primarily enjoy two types of tax benefits: deduction and exemption benefits. Deduction tax benefits enable individuals to deduct a portion of their investment amount from their gross total income, lowering their taxable income and tax liability.

Individuals with investments in Life Insurance plans such as Shriram Life Assured Savings Plan (UIN 128N089V04) can deduct premium payments u/s 80C, up to a maximum ₹1,50,000, as deduction benefits. Investments made in other Savings Plans, like the Public Provident Fund (PPF), Equity Linked Savings Scheme, etc., can also be claimed for deduction benefits.

Exemption tax benefits apply to the returns generated from Savings Plans. The returns from some investments can be tax-exempt u/s 10(10D) , subject to certain terms and conditions. Claiming both deductions requires strategic tax planning, so plan your investments wisely.

Importance of Tax Benefits

When choosing a Savings Plans or Investment Plans, always evaluate its associated tax implications as they will directly impact the net returns. It can help lower your immediate tax burden, freeing up more income for additional savings or investments.

Tax-exempt returns on maturity will ensure that the wealth generated through investments isn’t eroded by future tax liabilities. If you’re unable to choose the right plans for optimal tax credits and investment tax benefits, consult a reliable tax professional.

Common Tax-Advantages Savings Plans

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) are tax-advantaged accounts that help people save for retirement. Contributions to these tax-advantaged accounts often qualify for tax deductions and the investments grow tax-deferred until withdrawal.

In India, investments in National Pension System (NPS), Employee Provident Fund (EPF), Public Provident Fund (PPF), etc., provide comparable tax benefits u/s 80C, 80CCC, 80CCD(1), 80CCD(1B), etc., and retirement savings.

Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) are tax-advantaged accounts created especially for medical savings. In India, you can find health insurance policies with tax-saving components similar to HSAs. They provide varying tax deduction benefits u/s 80D, based on the dependents included in the policy. It can significantly lower your taxable income and liability.

Maximising Tax Benefits with Savings Plans

Contribution Limits

You must understand contribution limits to get maximum investment tax benefits and tax-free savings. Since different tax-advantaged accounts, such as Savings Plans, Retirement Plans, Child Plans, etc., provide tax deductions under different sections, knowing the maximum deduction limits can help optimize tax savings.

For example, investors can claim a maximum deduction of ₹1,50,000 u/s 80C for their investments in Unit Linked Insurance Plans (ULIPs) like Shriram Life Wealth Pro Plan (UIN: 128L096V01),  tax-saving Fixed Deposits (FDs), National Savings Certificate, etc., so ensure you don’t concentrate all your contributions in one area to prevent under utilising potential returns.

Explore different investment options that qualify for tax deductions under different sections for maximum tax-free savings.

Tax-Free Growth

Some plans let investments grow without attracting taxes at accumulation or withdrawal. In India, certain plans, such as the Public Provident Fund (PPF), Employee Provident Fund (EPF), etc., provide similar tax-free growth benefits. Some Unit Linked Insurance Plans (ULIPs) like the Shriram Life Fortune Builder (UIN: 128L038V03) also provide tax-free growth on market-linked earnings until withdrawal. 

Strategies for Effective Tax Planning

Regular Review and Adjustments

Whether you’re creating your financial planning or tax planning strategy for the current year, you should remember to review it routinely for timely adjustments. Since tax laws, contribution limits, eligible deductions, etc., may change at any time, it’s crucial to review your strategies timely so they’re aligned with the existing regulations.

Regular review and adjustments will ensure minimal or no missed opportunities for maximising tax benefits.

Consulting a Tax Professional

While self-directed tax planning strategies can be beneficial, staying informed of all the latest regulations, investment options, market conditions, etc., can be overwhelming for most individuals.

If you lack the relevant information and expertise to create highly efficient tax-saving plans, we recommend consulting a tax professional for personalised guidance. Besides saving your time and mental energy, professional tax consultation will also facilitate saving maximum taxes on your investment returns.

Conclusion

Investing in Savings Plans alone isn’t enough to achieve financial security; you must also be aware of the associated tax implications to receive maximum returns and fulfil long-term financial goals. Since different plans have different tax implications, we recommend checking the available tax benefits for your chosen investments and planning accordingly.

You can explore multiple Savings Plans at Shriram Life Insurance, one of India’s most trusted insurance providers, as they’re designed to help policyholders accomplish their financial goals while enjoying tax savings. Besides Savings Plans, we also provide numerous Protection Plans, Child Plans, Investment Plans, etc., that effortlessly align with most individuals’ financial goals.