Tax Savings in 2024: 5 Key Tax Efficient Investment Strategies

Navigating the world of tax deductions, credits, and tax forms can feel daunting, but with a little planning and preparation, you can conquer your tax return and unlock a financial windfall to fuel your new year's goals.

As the year 2024 unfolds, it's time to consider tax-planning moves that will help lower this year's tax bill and set you up for tax savings in future years.

Paying taxes eats up a significant portion of your savings, and this scenario occurs if you are not fully aware of the benefits of effective tax planning. Tax planning is one of the most important aspects of the financial discipline required for financial wellbeing.

Ideally, you should refrain from using last-minute tax-saving measures to reduce your tax burden as this might result in hasty decisions, and you may end up losing out on the opportunity to implement an effective tax-saving strategy, which may also lead to insufficient tax savings and stress.

One tax planning tactic is to invest in tax-saving instruments such as Section 80C, 80CCC, 80CCD, and 80D investments. The ideal time to start planning your tax-saving investments is at the beginning of the fiscal year.

[Read: How to Select the Best Suitable Tax-saving Option for You]

However, since FY 2023-24 is already in effect, a few last-minute investment ideas could reduce tax liability. Individuals can lower their tax burden by taking advantage of the many exemptions, deductions, and benefits provided by the Income Tax Act 1961.

Prudently managing tax liabilities may assist in accomplishing financial objectives by optimising investment returns. Adopting tax-advantaged accounts, using tax-loss harvesting techniques, and understanding the tax implications of various investment vehicles are essential for optimising after-tax returns.

The most discussed factor in tax planning is whether to opt for an Old or New tax regime. Choosing the right tax regime is a crucial element of tax planning as it can significantly impact your overall tax liability.

Salaried individuals must assess their options and select which tax regime-the Old or the New- will benefit them best. Analysing tax liabilities under both systems helps in opting for the one resulting in the least tax outflow. Although it is still optional, the recently implemented new tax system has reduced tax rates which benefits those individuals who were not eligible under the old tax regime.

[Read: Old or New Tax Regime - Which is Beneficial for You Post the Union Budget 2023-24 Announcements]

Let us explore a few key tax-efficient investment strategies that one may consider for 2024:

1. Investment Options Under Section 80C

The most popular tax-saving options available to individuals and HUFs in India are under Section 80C of the Income Tax Act, 1961. It includes various investments and expenses you can claim deductions on - up to the limit of Rs 1.5 lacs in a financial year.

• Park Your Money in Government Schemes

  The Indian Government provides a provision to invest up to Rs 1.5 lacs under section 80C of the Income Tax Act in order to promote saving. As a result, investing in tax-saving instruments under Section 80C allows you to both reduce your income tax liability and make investments for the future.

  Public Provident Fund (PPF): A long-term, government-backed scheme offering attractive interest rates (currently 7.1%) and tax-free maturity. It is ideal for retirement planning and wealth accumulation.

  Employee Provident Fund (EPF): Mandatory contribution for salaried employees, with contributions and interest exempt from tax. The employer also contributes, making it a lucrative option.

  National Pension Scheme (NPS): Government-backed scheme offering market-linked returns and tax benefits on contributions, investment income, and maturity amount. It can be used for retirement planning.

  Senior Citizen Savings Scheme (SCSS): High-interest-yielding scheme (currently 8.2%) exclusively for senior citizens (60 and above). Secure investment with tax exemption on interest earned up to Rs. 1.5 lakh.

  Sukanya Samriddhi Yojana (SSY): High-interest scheme (currently 8.2%) for girl child under 10 years. Tax benefits on contributions and interest. Long lock-in period but is an attractive option for a girl child's future.

  [Read: Small Savings Schemes: Revision of Interest Rates for the Quarter January-March 2024]

• Tax Benefits on Home Loan

  Buying a home loan can indeed offer significant tax benefits under Section 80C of the Indian Income Tax Act. You can claim a deduction on the principal amount repaid on your home loan in a financial year, up to a maximum of Rs 1.5 lacs. This significantly reduces your taxable income.

  If you buy a new property, you can also claim a deduction on the stamp duty and registration charges paid within the same financial year, subject to a maximum limit of Rs 45 lacs for the property value.

  The tax benefits apply only to the home loan used to purchase or construct a self-occupied residential property. Loans for second homes or rented properties don't qualify. To claim the full deduction on the principal amount, you must hold the property for at least five years after possession.

• Invest in Mutual Funds - ELSS

  Equity Linked Saving Schemes (ELSS) is a type of mutual fund that offers the combined benefits of wealth creation through equity exposure and tax savings under Section 80C of the Income Tax Act.

  You can claim a deduction of up to Rs 1.5 lakh per year on the amount invested in ELSS funds. This reduces your taxable income, potentially lowering your tax liability. ELSS funds offer the potential for higher returns compared to other conventional tax-saving instruments.

  Investing in ELSS promotes wealth creation in the long term, aligning with retirement planning or other financial goals. ELSS have a relatively short lock-in period of 3 years compared to other tax-saving options.

  [Read: 7 Top-performing ELSS (Tax Saving Mutual Funds) with High Returns on 10-Year SIP]

  ELSS carry market risk like other equity investments, and their returns can fluctuate. You should not solely invest in ELSS for tax benefits without considering your risk tolerance and investment goals. Understanding the tax benefits and investment risks can help you make informed decisions about incorporating ELSS into your tax-efficient investment strategy.

  Remember, the total deduction claimed under Section 80 C cannot exceed Rs 1.5 lacs per financial year.

  Apart from the Section 80C deductions, there are other various deductions and exemptions that one may use to save on Income Tax.

2. Tax Benefits on Insurance Premiums

The maturity amount is completely free from income tax under Section 10 (10D) if the life insurance premium is below 10% of the sum assured (if the policy is purchased after the 1st of April, 2012).

One can claim tax deductions under Section 80D for the portion of their annual taxable income spent on health insurance premium payments. An Individual may deduct (for taxation purposes) up to Rs 25,000 for their own insurance premium as well as their spouse's and dependent children's insurance premium.

An additional deduction of Rs 50,000 per year is available for premiums paid for your parents' health insurance policies if they are above 60 years old. For a detailed understanding, read this.... Importance of Insurance | Why Do You Need Insurance Cover

3. Interest Paid on Home Loan

Interest paid on a home loan can be claimed as a deduction under Section 24 up to Rs 2 lakh per financial year. Moreover, the entire interest component is exempt from annual income tax computations if you rent out the newly purchased home.

Section 80EE also allows you to claim a deduction of up to Rs 50,000 on home loan interest which is over and above the limit of section 24. Under section 80EEA, you can claim up to Rs 1,50,000 for the stamp duty and registration charges paid on new property within the same financial year. However, this deduction is available only for loans sanctioned between April 01, 2019, and March 31, 2022, and the stamp duty value of the property is not more than Rs 45 Lakhs.

[Read: An Ultimate Guide for the First-time Home Loan Borrowers]

By combining the deductions allowed under Sections 24 and 80C, you can potentially reduce your taxable income on your home loan by Rs 3.5 lakh per year, leading to substantial tax savings.

4. Tax Exemption on Wedding Gifts

The Income Tax Act exempts from taxation any type of wedding gift from immediate family. Parents, siblings, siblings' spouses, and grandparents are considered immediate relatives. In India, gifts given by close friends and relatives to mark a marriage are not subject to income tax.

Only tangible gifts, such as money, jewellery, real estate, or household goods, are exempt from this rule. Presents such as services given or costs paid on your behalf (such as the cost of a wedding planner) are not included. The maximum amount that can be spent on gifts from relatives is Rs 50,000. Any gifts over this threshold will be charged at the appropriate tax slab.

5. Tax Benefits on Charity Donations

For donations given to particular relief funds and charity organisations, you are eligible for a deduction under Section 80G of the Income Tax Act.

However, under Section 80G, not every donation qualifies for a tax deduction. Only contributions made to designated funds are tax deductible. The deduction amount varies depending on the type of donation and the institution receiving it.

Donations to the Prime Minister's Relief Fund, National Disaster Relief Fund, or certain charitable institutions working towards scientific research or rural development qualify for a 100% deduction, subject to certain conditions.

Always obtain a receipt for your donation from the designated institution for claiming the deduction.

Additionally, interest paid on an education loan is allowed as a deduction under Section 80E only when the loan is taken for yourself, your spouse, your children, or a person for whom you are the legal guardian. Under Section 10(16) of the Income Tax Act, any scholarship awarded to deserving students to help with educational expenses is exempt from income tax.

For a maximum of Rs 10,000, interest earned on savings accounts is generally tax-exempt. This sum represents the total of all savings accounts. For senior citizens, this cap is increased to Rs 50,000 under Section 80TTB.

To conclude...

Tax planning is not a one-size-fits-all approach; tailor your strategies to your unique income, expenses, goals, and risk tolerance. Don't hesitate to seek professional guidance for intricate scenarios. By implementing these strategies proactively, you can conquer tax season with newfound knowledge and minimise your financial bite.

Remember, knowledge is power, and a proactive approach to tax planning is the key to unlocking a financially secure future. Start today, unleash your financial potential, and let 2024 be the year you master the art of tax efficiency!

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.