Tax Saving Instruments

Tax saving instruments are investments that allow you to reduce your tax liability by taking advantage of various tax deductions, exemptions, and rebates. These financial tools not only help you to minimize the tax payable but also serve as valuable investment options for financial planning and wealth creation.

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This article will help you to understand and effectively utilize the tax-saving instruments for savings and improved financial well-being.

Best Tax Saving Instruments in India

The list of top 10 tax saving options is mentioned in the following table:

Tax Saving Instruments Tax Benefits under Section*
Unit Linked Insurance Plans (ULIP)
  • Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 
  • Tax-free returns u/ Section 10(10D) 
Capital Guarantee Plans
  • Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 
  • Tax-free returns u/ Section 10(10D)
Life Insurance
  • Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 
  • Tax-free returns u/ Section 10(10D)
New Pension Scheme (NPS)
  • Up to Rs. 1.5 lakhs on Premiums u/ Section 80CCD(1)
  • Additional deduction up to Rs. 50,000 u/ Section 80CCD (1B)
Equity-linked Tax Saving Scheme (ELSS) Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 
Public Provident Fund (PPF) Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 
National Saving Certificates (NSC) Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 
Senior Citizen Savings Scheme (SCSS) Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 
Sukanya Samridhi Yojana (SSY)
  • Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 
  • Tax-free returns u/ Section 10(10D)
Tax- Saver Fixed Deposits Up to Rs. 1.5 lakhs on Premiums u/ Section 80C 

 *To avail of the tax benefit under various sections of the IT Act of 1961, you must fulfil the conditions as per the current tax laws.
Now, let us learn about these tax-saving instruments with their returns in more detail.

  1. ULIPs (Unit Linked Insurance Plans)

    If you are looking for long-term investment, then ULIPs are good tax-saving instruments. It offers you both life insurance as well as the best investment options. Your premium is invested in the debt and equity market, offering you high tax-free returns. You can expect good investment growth of around 11-20% from a ULIP when you invest for a long-term period. ULIPs are tax saving investments that offer you tax benefits under Section 80C and 10(10D). These are the best investment plans that provide you with financial security through life coverage as well as high returns through equity and debt instruments. 

  2. Capital Guarantee Plans

    Capital Guarantee Plans are tax-saving investment options that ensure the return of your initial capital at maturity, offering a level of financial security. These plans are designed to protect your principal investment, making them a low-risk option for those who prioritize capital preservation. These tax-saving instruments provide you with returns of around 9-15% p.a. The capital guarantee plans combine a mix of fixed-income and equity investments to achieve this guarantee. You can avail of tax benefits under Section 80C and Section 10(10D) for your investments in these income tax saving instruments.

  3. Life Insurance Plan

    You should have a life insurance policy not just for tax exemption but for securing your family’s future in your absence. These tax savings instruments provide deductions of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act. Also, in case of the death of the insured, the lump sum offered to the beneficiary as the death benefit is not taxable under Section 10(10D).

  4. New Pension Scheme (NPS)

    If you are concerned about your retirement and are looking forward to a plan with income tax benefits, then NPS is among the best tax-saving instruments. NPS is known for its investor-friendly features, low-cost structure, and flexibility. Here, you can invest a minimum amount of Rs. 6000 annually in instalments of at least Rs.500 or as a lump sum. Being the investor, you get to decide how to allocate money for investment in gilts, corporate bonds and equity.  

  5. Equity-linked Tax Saving Scheme (ELSS)

    ELSS mutual funds are one of the best tax-saving instruments for people willing to invest in short-term plans, as its lock-in period is three years. Also, this equity fund generates good returns over the long term, with the flexibility of investing just Rs. 500. Here, you are not bound to continue investing further after the lock-in period, as in the case of a pension plan or insurance plan. It is better to invest your money over a period through Systematic Investment Plans (SIP) instead of investing a lump sum amount in a single go. You can also estimate the returns on your periodic investments through the SIP Calculator.

  6. Public Provident Fund (PPF)

    PPF is one of the most preferred tax-saving options for income tax benefits under Section 80C. This long-term saving scheme has a lock-in period of 15 years, and it can be extended in blocks of 5 years. You can invest annually up to Rs. 1.5 lakhs per annum in a PPF Account. You can invest anything from Rs. 500 to Rs. 1.5 lakhs (maximum) as instalment or as a lump sum amount. A PPF account can be started in a bank or a post office branch. This is one of the best tax saving instruments for people who are not covered under EPF, are self-employed professionals, or are risk-averse investors.

  7. National Saving Certificates (NSC)

    NSC is a fixed deposit scheme offered by the Post Office. The one quality that makes a National Saving Certificate (NSC) different from a Bank Fixed Deposit (FD) is that it offers high returns with tax saving options as compared to the latter.You can easily avail of the benefit of tax savings under Section 80 C of the Income Tax Act with this scheme. However, NSC is a tax saving investment option that also has a lock-in period of 5 years associated with it. The longer the period you invest with NSC, the higher are your returns and tax benefits on the earned interest. Furthermore, there is no premature withdrawal possible in this scheme.

  8. Senior Citizen Savings Scheme (SCSS)

    The Senior Citizen Savings Scheme (SCSS) is a tax-saving instrument in India, primarily designed for senior citizens. It offers tax benefits of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act. Senior citizens can invest a lump sum in this scheme, and the invested amount is deductible from their taxable income. This helps in reducing their overall tax liability, making it a tax-efficient savings option for seniors.

  9. Sukanya Samridhi Yojana (SSY)

    Sukanya Samriddhi Yojana (SSY) is one of the most effective tax-saving instruments for parents who want to save for their daughters. Sukanya Samriddhi Account (SSA) can be opened in the designated banks and Post Office branches in the name of the girl child. The scheme can be opened for girls less than or up to 10 years of age with a minimum investment amount of Rs. 250.

    The government declares the interest rate every quarter just like other post office saving schemes, and the interest rate for Oct-Dec 2023 (Q3, FY 2023-24) is 8.0%. The interest rate is higher than what a PPF offers and also offers tax benefits under Section 80C and 10(10D) in the old tax regime.

  10. Tax Saving FDs

    Tax saving FDs are a type of fixed deposit which offers tax exemption benefits under Section 80C of the Indian Income Tax Act, 1961. By investing in tax-saver fixed deposits, you can claim up to a maximum of Rs. 1.5 lakhs as tax deduction benefits. These tax-saving instruments have a lock-in period of 5 years, and only individuals and HUFs can invest in tax saver fixed deposits. However, TDS is applicable on the interest earned on tax-saving FDs as per your tax bracket. The tax-saving FD interest rates offered by various banks range between 5% - 8.5% p.a. 

Over to You!

Now that you know the top 10 tax-saving instruments for 2024 and beyond, it makes sense to put the learning into practice and invest in one of these to save your hard-earned money from getting depleted at the time of taxation. However, be careful of planning your savings not just for the purpose of tax exemption but also for a better and financially stable future.

FAQ's

  • What are all tax-saving instruments?

    Some of the most popular tax-saving instruments in India are as follows:
    • Unit Linked Insurance Plans (ULIPs)

    • Guaranteed Return Plans

    • Public Provident Fund (PPF)

    • Equity Linked Savings Scheme (ELSS)

    • National Pension Scheme (NPS)

    • Unit Linked Insurance Plans (ULIPs)

    • National Savings Certificate (NSC)

  • What are the financial instruments under 80C?

    The following financial tax saving instruments are eligible for deductions under Section 80C of the Income Tax Act, 1961:
    • Unit Linked Insurance Plans (ULIPs)

    • Capital Guarantee Plans

    • Public Provident Fund (PPF)

    • Equity Linked Savings Scheme (ELSS)

    • National Pension System (NPS)

    • National Savings Certificate (NSC)

    • Tax Saver Fixed Deposit (FD)

    • Senior Citizen Savings Scheme (SCSS)

    • Sukanya Samriddhi Yojana (SSY)

    • Home Loan Principal Repayment

  • Is ELSS taxable after 3 years?

    Yes, ELSS is taxable after 3 years, but only if the gains exceed Rs 1 lakh. ELSS funds have a lock-in period of 3 years, after which you can redeem your investment. The redemption proceeds are taxed as long-term capital gains (LTCG). LTCG up to Rs 1 lakh in a financial year is tax-free. Any LTCG above Rs 1 lakh is taxed at 10%.
  • Which investment is tax-free on maturity?

    The following tax-free instruments are tax-free on maturity in India:
    • Unit Linked Insurance Plans (ULIPs)

    • Capital Guarantee Plans

    • Public Provident Fund (PPF)

    • Sukanya Samriddhi Yojana (SSY)

    • National Pension System (NPS)

    • Tax Saver Fixed Deposit (FD)

    • Senior Citizen Savings Scheme (SCSS)

  • Which investment is 100% tax-free?

    The tax-free instruments in India are the Unit Linked Insurance Plans (ULIP), Public Provident Fund (PPF), and Sukanya Samriddhi Yojana (SSY). PPF, ULIP and SSY offer a triple tax exemption, i.e., the investment, interest earned, and maturity proceeds are all tax-free.
  • What are the investments to save tax?

    There are a number of tax-saving investment options in India that can help you save tax. Some of the most popular options include:
    • Unit Linked Insurance Plans (ULIPs)

    • Capital Guarantee Plans

    • Public Provident Fund (PPF)

    • Equity Linked Savings Scheme (ELSS)

    • National Pension System (NPS)

    • Unit Linked Insurance Plans (ULIPs)

    • National Savings Certificate (NSC)

    • Tax Saver Fixed Deposit (FD)

    • Senior Citizen Savings Scheme (SCSS)

    • Sukanya Samriddhi Yojana (SSY)

    • Home Loan Principal Repayment

    • Health Insurance

    • Life Insurance

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ

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