What are the tax benefits of contributing to a 401(k) or IRA?

401(k) and IRA are retirement savings accounts in the US, and as this answer is focused on the Indian audience, I will discuss the tax benefits of contributing to the Indian equivalents.

In India, the most popular taxsaving investments are:

1. Public Provident Fund (PPF): It is a longterm investment option with a lockin period of 15 years. Contributions to PPF qualify for a tax deduction under Section 80C of the Income Tax Act, and the interest earned and the maturity amount are taxfree.

2. EquityLinked Savings Scheme (ELSS): It is a type of mutual fund that invests primarily in equity and has a lockin period of three years. Investments up to Rs. 1.5 lakh in ELSS are eligible for a tax deduction under Section 80C.

3. National Pension System (NPS): It is a voluntary retirement savings scheme that invests in a mix of equity, debt, and government securities. Contributions up to Rs. 1.5 lakh to NPS are eligible for a tax deduction under Section 80CCD (1B), in addition to the Rs. 1.5 lakh under Section 80C.

4. TaxSaving Fixed Deposits: Many banks offer taxsaving fixed deposits with a lockin period of five years. Investments up to Rs. 1.5 lakh in taxsaving fixed deposits qualify for a tax deduction under Section 80C.

5. Unit Linked Insurance Plans (ULIPs): It is a type of insurancecuminvestment product that invests in a mix of equity and debt. Premiums paid towards ULIPs up to Rs. 1.5 lakh are eligible for a tax deduction under Section 80C.

Investing in these taxsaving instruments can help individuals reduce their tax liability and save money on taxes. It is important to note that the tax benefits of each instrument vary and one should choose the investment option that aligns with their financial goals and risk profile. It is also important to consult a tax professional before making any investment decisions.