What is tax-free?
Tax-Free is a term used to describe a situation in which products or services are not subject to taxation. This can include both sales taxes, as well as income and property taxes. Tax-Free refers to situations where an individual or organization pays no tax on the purchase or sale of goods or services, meaning they receive a full refund at the time of purchase.
Tax-Free also applies when individuals invest in certain types of securities, such as municipal bonds, which may carry some type of exemption from taxation.
Tax-free Investment Options in India
- National Pension Scheme (NPS): The NPS is a tax-free retirement savings instrument administered by the Government of India. It allows individuals to save, invest, and manage their funds for retirement. Contributions made to the NPS are exempt from tax under Section 80CCC of the Income Tax Act, 1961. Additionally, withdrawals at retirement are also tax-free up to 40% of the corpus accumulated in the NPS account.
- Pension Plans: Pension plans are similar to NPS in that they are designed to provide a source of income during retirement after you have finished earning an active income through your primary job or business venture. Several insurance companies offer pension plans which allow contributions up to Rs 1.5 lakhs per year and such contributions qualify for tax deductions under Section 80C of the Income Tax Act. During withdrawal at maturity, the entire corpus is exempted from taxation provided certain conditions are met.
- ULIPs: Unit Linked Insurance Plans (ULIPs) combine life insurance with investment opportunities and offer several advantages such as long-term capital gains benefits and potentially high returns on investments over time. Any contribution made towards a ULIP plan qualifies for tax deduction under Section 80C of IT Act, 1961, and any returns earned on maturity are completely exempted from taxation pursuant to Section 10(10D).
- Endowment Plans: Endowment plans provide life cover while simultaneously allowing you to save money in an insured fund over a period of time with regular premium payments towards it. These premium payments enjoy exemption from tax liability under Section 80C up to Rs 1.5 lakhs per financial year and at maturity, any returns earned on your investment can be withdrawn without being subject to taxation according to provisions contained in Section 10(10D).
- Term Insurance: Term insurance policies offer protection for a predetermined duration or period of time upon payment of premiums each month/year or lump sum payment upfront depending upon the plan opted for by you as policyholder. Such premiums paid enjoy concession from taxation under Section 80C if they don’t exceed Rs 1.5 lakhs per financial year and no taxes apply on death benefits received by nominees at maturity either where they form part of an exempt class stated in IT Act, 1961 or due provisions contained in section 10 (10D).