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Tax Saving Instruments

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

Thankfully, we can save ourselves from the tax trap by making maximum possible investments in tax-saving instruments. 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 the 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

Tax Saving Instruments Tax Benefits Under Section Total Tax Deduction
Life Insurance Section 80C (Premium) & Section 10(D) (Death/Maturity) Up to Rs. 150000
Health Insurance Section 80D Up to Rs. 55,000 
ULIPs 80CCC Up to Rs. 150000
New Pension Scheme (NPS) Section 80CCE/ section 80CCD (1B) Up to Rs. 150000Additional Rs. 50,000
Equity-linked Tax Saving Scheme (ELSS) Section 80C Up to Rs. 150000
Public Provident Fund (PPF) Section 80C Up to Rs. 150000
National Saving Certificates (NSC) Section 80C Up to Rs. 150000
Infrastructure Bonds  Section 80CCF Up to Rs.20000
Sukanya Samridhi Yojana Section 80C Up to Rs. 150000
Fixed Deposit Section 80C Up to Rs. 150000


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

Life Insurance Plan

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 the death benefit is not taxable under section 10(10D).

Health Insurance Plan

Apart from the tax benefit under section 80C, you can also try other tax saving instruments option 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 disability (under the personal accident rider) is not taxable. 

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

ULIPs (Unit Linked Insurance Plans)

If you are looking for long-term investment, then ULIP is a good tax saving instruments. 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. 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 instruments. 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 one 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, 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 instruments 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 the Government of India, you know that your money is absolutely safe in this scheme. You can easily avail of 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 the period you invest with NSC, the more eligible you become to make claim for any extra tax deductions; as your interest 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 the 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 an 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.

Sukanya Samridhi Yojana

Sukanya Samriddhi Yojana is one of the most effective tax saving instruments for parents who want to save for their daughter. The scheme can be opened in the designated public sector and private banks or in post offices in the form of a savings account in the name of the girl child. The scheme can be opened for girls less than 10 years old with a minimum investment amount of Rs. 1000.

The government declares the interest rate every quarter just like other post office schemes and the interest rate for Jan-Mar’20 (Q4, FY 2019-20) was 8.4%. The interest rate is higher than what a PPF offers and is also tax free in the existing tax regime with a capping of Rs. 1.5 lakh.

Sukanya Samriddhi Yojana scheme can be opened for a maximum of two daughters with a combined investment in both the accounts up to a maximum of Rs. 1.5 lakh in a year. The best part is that the Sukanya Samriddhi Yojana account is opened in the name of the girl child and the maturity proceeds need to be utilized for her marriage and education.

Tax Saving FDs

Tax saving FDs are a type of fixed deposits, which offer 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 lakh as tax deduction benefits. The tax saving fixed deposits 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 interest on FDs is earned either on a monthly or quarterly basis, which can be reinvested. Although investors lesser than 60 years of age can avoid this TDS deduction by submitting Form 15G to the bank and Form 15H in the case of senior citizens.

The interest offered may vary from one bank to another. However, the prevailing tax-saving FD, fixed deposit rates range between 6.5-7.6%. These FDs also make a good choice for last minute tax planning to avoid the complication of searching for the best tax saving instruments; you can simply invest in one of the tax-saver fixed deposits.       

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.

Written By: PolicyBazaar - Updated: 20 November 2020
Tax Saving Investment
Save Tax Under Section 80C
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