Tax Saving Investments
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Tax Saving Investments

Tax Saving Investments are an integral part of one’s life as they offer tax deduction under section 80C or 80CCC. Taking into account, the importance of these investments, people frequently wish to invest. However, they are not keen enough to invest due to low returns and different risks associated with various investments.

Tax saving investments

The tax-saving season starts from 1st April for both salaried and non-salaried taxpayers. As a smart investor, one should look for tax saving investments, which not only provides the benefit of tax exemption but also helps to earn tax-free income. There are many smart ways to save taxes and enjoy the maximum savings possible. However, for most of the individuals, tax-planning is a let’s do it later affair. A smarter approach is to start investing in the early quarters of the financial year so that one can get time to sensibly plan and can avail the maximum returns on investment from different tax-saving investments.

While choosing the right tax-saving investments plans it is important to consider the factors like safety, returns and liquidity. Also, it is important to keep a proper understanding of how the returns will be taxed. If the returns on investment are taxable, then the scope to create wealth over a long-term gets constrained.

Before moving on to the list of best tax-saving investments schemes, it is important to know about the key section of the Income Tax Act i.e. section 80C. Most forms of tax-saving investments plan work under the parameters of section 80C of the Income Tax Act. As per this section, the investments made by the investor are eligible for tax exemption up to a maximum limit of Rs. 1, 50,000.  Such investments include ELSS (Equity Linked Saving Scheme), Fixed Deposits, Life Insurance, Public Provident Fund, National Savings Scheme and Bonds. There are a very few investment avenues that provide a further tax deduction, over and above this limit. Let's take a look at the best tax-saving investments under section 80C of IT Act.

Best Tax-Saving Investments Under Section 80C

Although there are various tax-saving investment plans available in the market. People often get confused which plan best suits them. In order to make you choose the best investment plan for you depending on your risk appetite and preferences, we’ve come up with some of the best tax-saving investments u/s 80C of the Income Tax Act, 1961.

Investment

Returns

Lock-in Period

ELSS Fund

15%-18%

3  years

National Pension Scheme (NPS)

12%-14%

Till Retirement

Unit Linked Insurance Plan (ULIP)

Returns vary from plan to plan

5 years

Public Provident Fund (PPF)

7%-8%

15 years

Sukanya Samriddhi Yojana

8.5%

N/A

National Savings Certificate

7%-8%

5 years

Senior Citizen Saving Scheme

8.7%

5 years

Bank FDs

6%-7%

5 years

Insurance

Returns vary from plan to plan

3 years

ELSS (Equity-Linked Saving Scheme) Mutual Fund

The equity-linked saving scheme is the diversified mutual fund scheme, which has two different features- first the investment amount in ELSS scheme is eligible for tax exemption up to the maximum limit of Rs.1.5 Lakh under section 80C of Income Tax Act and secondly, the investment made in ELSS has a lock-in period of 3 years.  ELSS funds offer the interest rate of 15%-18%. However, the returns are not fixed in an equity-linked saving scheme and vary according to the market performance of the fund. The investors can opt for dividend or growth option in ELSS fund according to one’s own suitability or requirement. However, from April 1st 2018, the dividends in an equity scheme are 10% taxable. Thus, the investors who choose the growth option over dividend are likely to yield tax-effective returns.

In order to minimize the risk and gain long-term capital returns, the investors can diversify the investment in more than one ELSS scheme on the basis of the industry exposure and market capitalization. This tax saving investments scheme offers flexibility and liquidity in investment and is best suitable for individuals who have a high-risk appetite. ELSS scheme offers a high return on investment over a long-term period along with the benefit of tax-exemption. Besides this, ELSS investment also offers transparency and ease of investment as one can track their investment online in a simple and hassle-free way.  

National Pension Scheme (NPS)

As, one of the best tax-saving investments scheme National Pension Scheme help to provide tax-exemption under three different sections as mentioned below.

  1. The contribution, up to the maximum limit of Rs.1.5 lakh can be claimed for tax exemption under section 80C of IT Act.
  2. Under Section 80CCD (1b) one can get additional deduction up to Rs.50,000.
  3. If 10% of the basic salary of the individual is contributed by the employer in the National Pension Scheme, then the amount is not taxed.

The trio of tax benefit has increased the popularity of NPS among investors. However, in the national pension scheme, only 40% of the fund is tax exempted at the time of maturity. Also, in NPS it is mandatory to invest 40% of the corpus in the annuity plan in order to earn monthly income. The annuity paid to the investors after retirement is treated as income and is totally taxable.

One cannot make any withdrawals in NPS before retirement, except in some specific situations. The best part is that the national pension scheme provides the flexibility to select between Auto and Active choice for distribution. If the subscriber selects the option of active choice, then they will need to mention the percentage distribution between equity, gilt and corporate. However, it should be remembered that the maximum investment that one can make into equity is 50%.

With the combination of equity and bond, one can gain good returns on investment over a long-term period. Moreover, as a government-backed tax-saving investments the NPS provides safety and transparency in investment. The costs of investment in NPS are very low. One can start investing in a national pension scheme with a minimum amount of Rs.1000 and can see their investments grow in a reasonable manner.

Unit Linked Insurance Plan (ULIP)

ULIPs are another tax-saving investments, which not only provides the benefit of tax exemption to the investors but also helps them to gain high returns on investment over a long-term period.  Unlike before, the new age ULIPs launched by the insurance companies comes with zero premium allocation charges and zero administration charges, which result in better returns to the investors.

Moreover, with the combined benefit of insurance and investment, one can gain the benefit on the taxability of income on the premium paid towards the policy under section 80C of the Income Tax Act. The investment returns are also tax-exempted U/S 10(10D) of the IT Act. ULIP plans come with a lock-in period of 5 years and offer the investors the ease of investment. 

The investors also have the flexibility of investment as they can choose from the wide range of fund options to invest in. Also, in ULIP, one can make a free switch between funds 3-4 times in a year. Even though ULIP is a lucrative option of tax-saving investment, the returns on ULIPs entirely depend on the market performance of the fund.

Public Provident Fund (PPF)

PPF is a popular long-term tax saving in investments scheme, which incorporates the feature of tax-saving investments in order to help the investors to create financial cushion post-retirement. The interest rate on the PPF balance is reset on a quarterly basis.

In case of the implication of income tax, the Public Provident Fund enjoys an EEE status i.e. exempt, exempt and exempt. This means that the contribution made towards the PPF account, the interest earned and maturity proceeds are all tax exempted. Thus, it is considered as one of the best tax-saving investments products. Even though the interest rate on PPF keeps on changing the risk factor remains stable.

The public provident fund has a maturity period of 15 years that can be further extended for 5 years. A maximum of Rs1.5 lakh can be claimed for tax exemption under section 80C of the Income Tax Act. As a government-backed savings scheme, Public Provident Fund is the safest and ideal financial instrument which offers the benefit of return on investment over a long-term period.

Partial withdrawals are allowed every year in PPF account, after the completion of 7 financial years from the date of initiation. One can make a partial withdrawal, provided the withdrawal amount should not exceed 50% of the balance. In a financial year, an individual can make only one withdrawal.

As a government-initiated savings scheme, PPF offers the ease of investment as one can start contributing in PPF account with a minimum amount of Rs.500 and can contribute up to maximum Rs.1.5 lakh in a year. Moreover, the investors have the choice to contribute either in monthly instalments or a lump-sum amount. However, the maximum contribution of 12 instalments is allowed in a year.

Sukanya Samriddhi Yojana

Another tax saving investments option is Sukanya Samriddhi Yojana. It is a small deposit scheme, which is particularly designed for the girl child. The plan is launched as part of ‘Beti Bachao Beti Padhao’ campaign.  The Plan currently offers an interest rate of 8.1% and provide the benefit of tax exemption.  As one of the best tax-saving investments, the tax benefit offers under SSY are:

  • The investments made in Sukanya Samriddhi Yojana are eligible for tax exemption up to the maximum limit of Rs.1.5 lakh under section 80C of IT Act.
  • The interest accrues against the SSY account gets compounded annually is also eligible for tax exemption.
  • The maturity proceeds and withdrawal amount are also tax exempted.

One can open a Sukanya Samriddhi Yojana after the birth of girl child till she turns 10. The scheme remains operative for 21 years from the date of opening the account till the girl gets married after she turns 18 years of age.  Currently, Sukanya Samriddhi Yojana offers the highest tax-free return of 8.5%. As a long term investment option it also provides the benefit of compounding.

Sukanya Samriddhi Yojana offers ease of investment to the investors. Moreover, the cost of investment is also very affordable as one can make a minimum investment of Rs.250 (this amount of earlier Rs.1000) and can invest up to maximum Rs.1.5 lakh in a financial year. 

As a great tax saving investment option, the plan ensures the safety of investment and secures the future of the girl child.

National Savings Certificate

This is a fixed income tax saving investment scheme, which can be opened with any post-office. The National savings certificate ensures the safety of investment, as it is a government-initiated savings scheme. The plan is specifically designed to encourage the mid-income investors to make investment along with the benefit of taxability of income.  Similar to bank FDs and PPF, the NSC is also considered as a low-risk tax saving investment option, which offers guaranteed return on investment. Along with the benefit of transparency and ease of investment the tax benefits offered under the policy are:

  • As a government-initiated tax saving investment scheme, one can claim tax deduction up to the maximum limit of Rs.1.5 lakh under Section 80C of IT Act.
  • The interest earned on the certificates is added back to the initial investments and is eligible for tax exemption.
  • In the second year of investment in NSC account, the investors can claim a tax deduction on NSC investment of that year, as well as the interest earned on the previous year. This is because the interest earned is added to the investment and is compounded annually.

On maturity of this tax saving investments scheme, the individual will receive the entire maturity amount. Since no TDS is applicable on NSC payouts; the investors are required to pay the applicable tax on it. 

Senior Citizen Saving Scheme

Senior citizen Savings Scheme is a government-backed tax saving investments scheme, which is specifically designed to provide financial safety to the senior citizens. Individuals above 60 years are eligible to invest in SCSS.  Under this scheme, the investors are eligible to make a one-time deposit of minimum Rs.1000 and can invest up to maximum Rs.15 lakh (In case of joint holding) and Rs.9 lakh (in case of single holding). Thus, the cost of investment in SCSS is very flexible.

Senior Citizen Savings Scheme comes with a lock-in period of 5 years. In SCSS the interests are payable on a quarterly basis.  Under this tax saving investment, the deduction of up to Rs1.5 lakhs is applicable for TDS under section 80 C of Income Tax Act.  As compared to the other tax-saving investments, senior citizen saving scheme offers the highest interest rate of 8.7% per annum and ensure a guaranteed return to the investors. Besides this, the scheme also allows premature withdrawal in case of any financial emergencies. 

Let’s take a look at the list of public sector banks which offers SCSS account.

  1. Andhra bank
  2. Allahabad Bank
  3. State Bank of India
  4. Bank of Maharashtra
  5. Bank of Baroda
  6. Bank of India
  7. Canara Bank
  8. Central Bank of India
  9. Corporation Bank
  10. Dena Bank
  11. Union Bank of India
  12. UCO Bank
  13. Syndicate Bank
  14. IDBI Bank
  15. Vijaya Bank
  16. Indian Bank
  17. Punjab National Bank
  18. Indian Overseas Bank
  19. United Bank of India

Bank Fixed Deposit Scheme

Bank FDs are security deposits, which is similar to other guaranteed return investment options. The only difference is that the tenure of investment applicable in Bank FDs is for 5 years. As a tax-saving investments plans, the bank FD offers tax-free income.  This plan is best suitable for individuals who have a low-risk appetite and want to save money over a long-term period.  Bank FD offers guaranteed return on investment to the individuals and also ensure the safety of investment as the amount invested get locked-in up to the entire tenure.

In tax-saving investment FD, one can claim up to the maximum limit of Rs.1.5 lakh under section 80C of the Income Tax Act. The banks set the interest rate of the fixed deposit scheme which can be changed every quarter or financial year. Bank Fixed Deposit has higher interest-earning potential as compared to the savings account and allows only one-time lump-sum payment. As Bank FD has a tenure of only 5 years, it does not allow premature withdrawal.

 Insurance

Life Insurance is considered as a tax saving investment products available in the market. However, it is not advised to the individuals to buy a life insurance policy only with the motive of saving tax as the main objective of these insurance policies is to provide insurance coverage.

Along with the benefit of insurance coverage, one can also avail benefit on the taxability of income under section 80C and 10(10D) of the Income Tax Act. In a life insurance policy, the premium paid and maturity proceeds toward the policy are tax-exempted. Moreover, the returns offered under the policy like endowment or money-back are also tax-free.  Under life insurance policy one can claim tax exemption up to the maximum limit of Rs.1.5 lakh.

Additional Tax-saving Investments Beyond Section 80C

Apart from tax deduction under section 80C, there is various tax-saving investments, which helps to save on taxes.

  • One can gain tax benefit on the premium paid towards health insurance and home loan interest.
  • A person can claim deduction up to Rs.25,000 on the premium paid towards health insurance under section 80D of Income Tax Act.
  • Under Section 80EE of Income Tax Act, one can claim deduction up to Rs.50,000 on home loan interest.
  • The home loan also helps in reducing the taxable income as the principal amount of the home loan can be claimed U/S 80C up to Rs.1.5 lakh and the interest amount can be claimed as deduction from income from house property.

How to Plan the Tax-saving Investments

Even though, most of the taxpayers delay tax planning till the last quarter, which results in hassled decisions.  The best time to plan the tax-saving investments is at the beginning of the financial year. If an individual start planning for tax-saving investments at the beginning of the financial year, then the investments made can multiply over a long-term period and can help the individual to fulfil their long-term financial goals.  The tax-payers can follow these pointers to plan the tax saving for the year and make a wise decision while investing in tax saving instruments plans.

  • Check your tax-saving expenses which pre-exist such as insurance premium, the contribution made towards EPF account, children’s tuition fees, home loan repayment, etc.
  • If your tax-saving expenses cover the maximum limit of Rs.1.5 lakh then you will not require investing the entire amount.
  • Based on the goal and risk profile, choose the tax-saving investments such as PPF, ELSS funds, Bank FDs and NPS.

Payment Applicable for Tax Saving Deduction U/S 80C

Let’s take a look at the payments applicable for tax deduction U/S 80C of IT Act.

Life Insurance Premium Payments

This is the most popular tax saving investments schemes. The premium paid towards the life insurance policy up to the maximum limit of Rs.1.5 lakh in a financial year is eligible for tax exemption under section 80C of Income Tax Act.  The exemption is applicable only in case the premium is less than 10% of the sum assured.

Children’s Tuition Fees Payments

The education fees paid for children up to the maximum limit of Rs.1.5 lakh are also eligible for tax exemption under section 80C of Income Tax Act.

Home Loan Repayment

Tax exemption under section 80C of Income Tax Act is applicable to the amount home loan repayment is taken by the individual to purchase or construct a residential property. This deduction is also applicable on registration fees, stamp duty and transfer expenses.

Tax Saving Investments - FAQs

Q1: Which investment instruments are tax-free?

Some of the top tax-free investment options are:

  • Sukanya Samriddhi Account
  • Public Provident Fund (PPF)
  • Senior Citizens Saving Scheme
  • National Pension Scheme (NPS)
  • Employee’s Provident Fund (EPF)

Q2: Where should I invest to save tax?

The easy tax saving investments that should be known by all the taxpayers of India are:

  • 5 years Bank Fixed Deposit
  • Public Provident Fund (PPF)
  • National Savings Certificate (NSC)
  • Equity Linked Saving Schemes (ELSS)
  • Unit Linked Investment Plan (ULIP)
  • National Pension Scheme
  • Life Insurance
  • Senior Citizen Savings Scheme (SCSS)

Q3: Do I have to pay taxes on the investments?

The taxes on the investments depend on the type of investment you are making. Here are some of the investment types wherein the taxes are levied:

  • Capital Gains: This means when you sell some of your investments at a profit, you are taxed.
  • Dividends and Other Income Types: With profits of selling the investments, you have to pay the interest on dividends, interest, rental or other types of income that you get.
  • Tax on Interest: Even though the interest gained from various tax saving schemes is tax-free, but there are many cases wherein you have to pay taxes on the interest you gained.

Q4: How many tax-free investment instruments can one have?

There is no limit on the number of tax-free investment instruments that one can take. However, there is a limit of deduction under which one can claim the tax benefits. These limits are according to different Income Tax Act's Sections.

Q5: How will I be able to pay less tax on higher income?

You can save taxes by making investments in the tax-free investment instruments. In this way, you will be able to pay lesser taxes on high income.

Q6: How much should I save for my taxes?

You can claim a tax deduction of up to Rs.1 Lakh 50 Thousand towards the premiums that you have paid as per the Section 80C of the IT Act, 1961.

Q7: What investments come under Section 80C of the Income Tax Act?

The following investment instruments get tax deduction under Section 80C of the Income Tax Act, 1961:

  • NSC
  • PPF
  • SCSS
  • Life Insurance
  • ELSS Mutual Funds
  • Pension Fund
  • 5 years Bank Fixed Deposits
  • 5 years Post Office Deposits

Q8: What is the maximum limit of investment under Section 80C?

You can invest a maximum of Rs.1, 50, 000 under Section 80C of the Income Tax Act, 1961 from your total taxable income.

Q9: How can I reduce my taxes legally?

By making investments in the government approved tax-free investment instruments, you can reduce your taxes legally.

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