Tax saving investment options for lower-income slabs


The taxpayers will have two options to file the income tax return (ITR) for income earned during the 2020-21 fiscal year or the assessment year 2021-22. The ITR may be filed per the existing tax rates and income slabs or a new tax regime (NTR) may be chosen. In the NTR no major exemptions or deductions available under the Revenue Tax Act are permitted. Anybody wishing to stick to the old tax system, however, is subject to exemptions or deductions like Section 80 C, Section 80 D, Section 24, etc. However, there are certain taxable and tax-free investments within tax saving options.

If you have an income ranging from Rs2.5 and Rs5 lakh, you have to pay a 5% tax while the higher income range ranges from Rs5 lakh to Rs10 lakh has to be paid a 20 % tax. Although the lowest taxpayers may not have to save a lot of tax, even if they have to, their taxable fixed-income investments are suitable compared to those paying the highest 30% tax rate. Tax savings-investment includes a few investments such as NSC (Senior Citizens’ Savings Scheme) (SCSS), 5-year bank fixed deposit, a 5-year postal deposit), etc. What distinguishes them from PPF, EPF, or insurance schemes is that they do not have a tax-free interest or return.

The PPF, EPF, or Ulips returns are free of tax in the hands of the taxpayer.

At present, fixed income tax savers have a low-interest rate. The post-tax return in taxable savers is further reduced if the interest earned is taxable. If the taxable investment interest rate is 6 percent, the return after tax for various tax rates, including cessation, are as follows:

  • For 5 percent tax rate: 5.7 percent
  • For a 20 percent tax rate: 4.8 percent
  • For a 30 percent tax rate: 4.1 percent

You can use the following formula to calculate the post-tax return:

Return after tax = IR – (IR * TR)

Here the interest rate is IR and the tax rate is TR.

Taxable investments, therefore, match those who pay the highest rate on the lower tax burdens. So, where are individuals to invest lower tax rates? “In such uncertain times, good and secure investment options are fixed deposits in banks subject to a deductible in Section 80C. The Life insurance products that provide retirement benefits should also cover 20% of the investments, and also protect the family against the sudden death of the earners. The insurance for Mediclaim should be done obligatorily.

The premium that is paid is deducted under Section 80D, “said Tax Connect Advisory Services partners Vivek Jalan, LLP partner.

Investing in products for tax savings like NSC, a five-year fixed deposit in banks, a five-year postage deposit is appropriate for the lower tax rate. But they can’t help you create wealth in the long term as after-tax, and returns are low after inflation. It should be used primarily to safeguard capital for short to medium-term objectives.


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