Best Ways to save Tax on Investment Income in India

Income makes little sense if not invested properly. After all, investment helps your money grow. We have a lot to take care of, and on top of that is the income tax which takes away a significant chunk of your income. People are always brainstorming about where to invest their money and are weighing the different options around good returns, transaction costs, flexibility, exit option, etc. However, another important factor to consider is taxation as people lose a lot of money on tax which can be easily saved. This is more true for salaried people. So let us take a look at different investment options and their tax implication on them.

1) Fixed Deposits are a favorite investment option for many people but one of the most inefficient ways when it comes to saving taxes. The interest on FDs gets added to your income and is taxed at your normal tax slab rate. A simple way to avoid this is to put your money into fixed-income MFs. A debt MF is slightly risky but the taxation is much lower. If held for 3 years or more the profits are taxed after getting the inflation indexation benefits. Effectively it means that if you are at a 30% tax slab rate, it goes down drastically to 10%-15%.

2) You should also not keep your money in savings bank accounts as even the measly 3.5%-4% gets taxed.

3) For salaried people, there are two ways to save tax under section 80D where Rs.1.5 lakh can be saved by investing through multiple options:

i) ELSS MFs

ii) PPF/ PF

iii) 5 years specific FDs

iv) others

You can also save another Rs.50K by investing in NPS.

4) If you invest in a house property, there is an option to save up to Rs.2 lakh as home loan interest.

5) Another way to save tax in real estate space is by investing the proceeds from selling the old house/ land into another house/ land. There are multiple provisions to save this capital gain tax as indexation benefit, window in which you can buy/ sell, number of house properties, etc. Also, rental income (after some deductions) from house property is added to your income and you have to pay tax on the same.

6) Equities sold post 1 year of holding is taxed at a flat rate of 10% and within 1 year are taxed at a flat 15%, irrespective of one’s tax slab rate. Also, profits of up to Rs.1 lakh are exempt from tax.

For business income, there is a high possibility of saving tax as you can offset business expenses as deductible as per the rules of the Income Tax Act of India. However, for salaried people, there is not much leeway except as described earlier.