What are tax saver schemes and how do they work?
—Hemant Singh
Section 80(c) of the Income-tax Act provides various ways in which taxpayers can reduce their taxable income by up to Rs1.5 lakh. Various deductions are provided under this section, such as: repayment of principal for a home loan, education expenses, and various investment options. The last category includes instruments like tax-deductible bank fixed deposits, Public Provident Fund, and tax-saving mutual funds. Among the investment options tax-saving mutual funds are, arguably, the best option. They have the lowest lock-in period (3 years) and the highest return potential (though the returns are not guaranteed). Practically every mutual fund company offers a tax-saving mutual fund. If you invest in one of these funds, you can claim that amount as a deduction from your taxable income (subject to the cap) and pay lesser taxes. The money will not be available for withdrawal for 3 years (lock-in period), after which it can be withdrawn with a 10.4% long-term taxes (with cess) on the gains. ICICI Prudential Long-term Equity fund and Invesco India Tax plan are good tax-saving funds to choose from.