Top 7 Tax Saving Instruments to Cut Your Tax Outgo

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Tax Saving Instruments

As someone has rightly said, “Three things are certain in life: Death, Taxes and Bills.”

Thankfully, we can save ourselves from the tax trap by making maximum possible tax-saving investments. Most of us view tax planning as a let’s-do-it-later project, and so start planning when the financial year nears its end. Because there is not much time left for forming a prudent investment plan, we end up making unnecessary investments.

It is good to start investing in the early quarters of the financial year. This way, you get ample time to carefully plan your tax saving investments, thus meeting your financial goals. Let’s take a look at top 7 tax saving instruments which can help you achieve your target of tax savings and at the same time provide good returns on investment.

Best Tax Saving Instruments in India

Sr No.

Tax Saving Instruments

Tax Benefits Under Section

Total Tax Deduction

1

Life Insurance

Section 80C (Premium) & Section 10(D) (Death/Maturity)

Up to Rs. 150000

2

Health Insurance

Section 80D

Up to Rs. 55,000

 

3

ULIPs

80CCC

Up to Rs. 150000

4

New Pension Scheme (NPS)

Section 80CCE/ section 80CCD (1B)

Up to Rs. 150000

Additional Rs. 50,000

5

Equity-linked Tax Saving Scheme (ELSS)

Section 80C

Up to Rs. 150000

6

Public Provident Fund (PPF)

Section 80C

Up to Rs. 150000

7

National Saving Certificates (NSC)

Section 80C

Up to Rs. 150000

Now let’s get to know these tax saving instruments in greater details.

Life Insurance

Every income-tax payer should have a life insurance policy not just for tax exemption, but for securing his/ her family’s future in his absence. According to the new budget, life insurance plan offers a tax benefit of up to Rs. 1.5 lakh 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 death benefit is not taxable under section 10(10D).

Health Insurance

Apart from the tax benefit under section 80C, you can also try other tax saving instrument options such as health insurance. It does not offer high returns, but you can enjoy tax deductions on the premium paid under section 80D. Health insurance premiums up to Rs. 25,000 will be subject to tax deductions. For senior citizens, the limit is increased from Rs. 20,000 to Rs. 30,000. If you purchase a health insurance plan for yourself and your parents then you are eligible for a deduction of up to Rs 35,000. The lump sum received in case of a disability (under the personal accident rider) is not taxable. 

  • Maximum tax savings
  • Low cost of investment
  • Minimum risk
  • Substantial returns 

ULIPs

If you are looking for long-term investment, then ULIP is a good investment option. It offers insurance to your investment. Your premium is invested in the debt and equity market, offering you tax-free returns. You can expect good results from a ULIP only if you invest for 10–12 years. There is no premium holiday in case of ULIP and your policy is likely to get discontinued if you fail to pay the premium. ULIP is a tax saving investment tool that allows you to switch between equity and debt. 

New Pension Scheme (NPS)

If you are concerned about your retirement and are looking forward to a plan with tax saving benefits, then NPS is the best tax saving instrument. NPS is known for its investor- friendly features, low-cost structure and flexibility. Here, you can invest a minimum amount of Rs. 6000 in installments 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 

Equity-linked Tax Saving Scheme (ELSS)

It is the best option 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, insurance plan or a ULIP. It is better to invest your money over a period of time instead of investing a lump sum amount in a single go. 

Public Provident Fund (PPF)

PPF is one of the most preferred options for tax benefits under section 80C. This long-term saving scheme has a lock-in period of 15 years and can be extended in blocks of 5 years. According to the new Budget, the annual investment limit has been increased to Rs. 1.5 lakh from Rs 1 lakh. A PPF account can be started in a bank or a post office branch. You can invest anything from Rs. 500 to Rs. 1.5 lakh (maximum) as installment or as a lump sum amount. PPF is one of the best tax saving tool for people who are not covered under EPF, are self-employed professionals, or are risk-averse investors.

National Saving Certificates (NSC)

NSC is a fixed deposit service available with Post Office. The one quality that makes National Saving Certificate different from a Bank Fixed Deposit is that it offers less return when compared to the latter one. However, the good news is, as it’s offered by Government of India, you know that your money is absolutely safe in this scheme. You can easily avail the benefit of tax savings under section 80 C of the Income Tax Act with this scheme. However, NSC also has a lock-in period associated with it, which ranges from 5 to 10 years. The longer period you invest with NSC, the more eligible you become to make claim for any extra tax deductions; as your interest is ensued every year in this scheme. However, there is no premature withdrawal possible in this scheme.

Infrastructure Bonds

If you fall under the fixed income category and are looking for risk-free tax saving instruments, infrastructure bonds will prove to be a good option for you. Infrastructure bonds are issued by the companies falling under infrastructure category that are approved by the Government of India. You will be able to get a modest rate of interest along with decent tax benefits with these bonds. An investment for up to Rs. 20000 is eligible in these bonds which can be utilized for income tax deduction (under Section 80C of the IT Act). Any minor who is an Indian resident and HUF (Hindu Undivided Families) can also apply for these bonds. However, there is a limit of one application per person. LIC, L&T Infrastructure are to name a few of the infrastructure companies that are into issuing infrastructure bonds.

Plan your savings not just for the purpose of tax exemption, but for a better and financially stable future.

Over to You!

Now that you know the top 7 tax saving instruments for 2017 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- Tax Saving Instruments  

Q.1 How can I invest to avoid paying taxes?  

Ans- As an investor, you should choose the investment plans which not only helps to you accumulate wealth in a long-term but also provides you the advantage of saving taxes and generate tax-free income.  So, in order to save on taxes you can consider investing in investment options such as National Pension Scheme, Senior Citizen Savings Scheme, Public Provident Fund, Equity Linked Savings Scheme, Unit Linked Insurance Plan and Sukanya Samriddhi Yojana.

Q.2. How do I reduce my taxable income?

Ans- Some of the best ways to reduce the taxable income are:

  • Contribute towards the retirement account.
  • Utilize section 80C- make full utilization of this section by investment in different investment options such as life insurance premium, equity linked savings scheme, public provident fund, Banks FDs and post office, national savings certificate, tuition fess paid for the child’s education up to maximum 2 children.
  • Take medical insurance as it provides the benefit of tax exemption under section 80D.
  • House Rent Allowance
  • Tax Savings from home loans.

Q.3 What are the best tax free investments?

Ans- Some of the best tax-free investment options to invest in India are:

  • Equity Linked Saving Scheme.
  • Public Provident Fund.
  • Employee Provident Fund.
  • Unit Linked Insurance Plan
  • Sukanya Samriddhi Plans
  • Senior Citizen Savings Scheme
  • Life Insurance Plans
  • National Pension Scheme

Q.4 What kind of investments is tax free?

Ans- Any investment is known as tax-free investment, if you get an exemption of 1.5 lakh under section 80C of Income Tax Act. This limit is set by the government on the amount invested by an individual. Secondly, at the time of maturity such investment can get tax exemption on the returns/interest earned. Generally, this does not have any limit. 

Q.5 How much should I invest in PPF to save tax?

Ans-You can invest minimum Rs.500 in a financial year and maximum up to Rs.1.5 lakh in PPF account in order to save on taxes.

Q.6. What is the maximum tax that can be saved?

Ans- By investing in PPF account an individual can save up to maximum Rs.40,000 in income tax every year.

Q.7 How can I legally pay less tax?

Ans- You can legally pay less tax by:

  • Contributing towards NPS
  • Utilize section 80C
  • Take medical insurance
  • Contribute to charity
  • House Rent Allowance
  • Get deduction on interest of home loan

Q.8 Is TFSA a good investment?

Ans- Yes, tax-free savings account are a  good investment option as it offers the benefit of higher return along with tax-free income. Even though, the contribution towards TFSA is not tax deducted, the withdrawal from TFSA is tax exempted.

Q.9 Is PPF good option to invest?

Ans- Yes, PPF is a good investment option as it is a government backed savings scheme which offers the benefit of wealth creation along with the advantage of tax exemption under Section 80C of Income Tax Act.

Q.10 Which is the best bank to open a PPF account?

Ans- You can open a PPF account in any nationalized bank and post office.

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