Tax Saving Investments

Tax Saving Investments are an integral part of one’s life as they offer tax deductions 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. 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 provide the benefit of tax exemption but also help to earn tax-free income.

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There are many smart ways to save taxes and enjoy the maximum savings possible. However, for most 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 investment 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 the 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 Online 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 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 the 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 about 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 Not fixed 3  years
National Pension Scheme (NPS) 9% to 12% Till Retirement
Unit Linked Insurance Plan (ULIP) Returns vary from plan to plan 5 years
Public Provident Fund (PPF) 7.1% currently 15 years
Sukanya Samriddhi Yojana 7.60% 21 years
National Savings Certificate 6.80% 5 years
Senior Citizen Saving Scheme 7.40% 5 years
Bank FDs 5.5% to 7.75% 5 years
Insurance Returns vary from plan to plan 3 years
  1. 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 the ELSS scheme is eligible for tax exemption up to the maximum limit of Rs.1.5 Lakh under section 80C of the Income Tax Act, and secondly, the investment made in ELSS has a lock-in period of 3 years. 

    ELSS funds offer an interest rate of somewhere between 5%-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 a dividend or growth option in an ELSS fund according to one’s 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 based on 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.

  2. National Pension Scheme (NPS)

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

    The contribution, up to the maximum limit of Rs.1.5 lakh can be claimed for tax exemption under section 80C of the IT Act.

    Under Section 80CCD (1b) one can get additional deduction up to Rs. 50,000.

    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 benefits 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 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 75%.

    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 investment 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. 500 and can see their investments grow in a reasonable manner.

  3. 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 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 a year. Even though ULIP is a lucrative option for tax-saving investment, the returns on ULIPs entirely depend on the market performance of the fund.

  4. 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 a financial cushion post-retirement. The interest rate on the PPF balance is reset every quarter.

    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 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 lakhs 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 that offers the benefit of return on investment over a long-term period.

    Partial withdrawals are allowed every year in the PPF account, after the completion of the 7th financial year 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 ease of investment as one can start contributing to a PPF account with a minimum amount of Rs.500 and can contribute up to a maximum of Rs.1.5 lakh in a year. Moreover, the investors have the choice to contribute either in monthly installments or a lump-sum amount. However, the maximum contribution of 12 installments is allowed in a year.

  5. 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 the ‘Beti Bachao Beti Padhao’ campaign.  The Plan currently offers an interest rate of 7.6% and provides 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 the 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 a 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 7.6%. As a long-term investment option, it also provides the benefit of compounding.

    Sukanya Samriddhi Yojana offers ease of investment to 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. 1,000) and can invest up to a maximum of 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.

  6. 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 mid-income investors to make investments along with the benefit of taxability of income.  Similar to bank FDs and PPF, the NSC is also considered a low-risk tax-saving investment option, which offers a 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 the 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 the NSC account, the investors can claim a tax deduction on the 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.

  7. 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 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 a minimum of Rs. 1,000 and can invest up to a maximum of Rs. 15 lakhs (In case of joint holding) and Rs. 9 lakhs (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 every quarter.  Under this tax saving investment, the deduction of up to Rs1.5 lakhs is applicable for TDS under section 80 C of the Income Tax Act.  As compared to the other tax-saving investments, the senior citizen saving scheme offers the highest interest rate of 7.4% per annum and ensures 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 offer SCSS account.

    • Andhra bank

    • Allahabad Bank

    • State Bank of India

    • Bank of Maharashtra

    • Bank of Baroda

    • Bank of India

    • Canara Bank

    • Central Bank of India

    • Corporation Bank

    • Dena Bank

    • Union Bank of India

    • UCO Bank

    • Syndicate Bank

    • IDBI Bank

    • Vijaya Bank

    • Indian Bank

    • Punjab National Bank

    • Indian Overseas Bank

    • United Bank of India

  8. 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 ensures the safety of investment as the amount invested gets 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.

  9. Insurance

    Life Insurance is considered a tax-saving investment product 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 sections 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 a 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 are various tax-saving investments, which help to save on taxes.

  • One can gain tax benefit on the premium paid towards health insurance and home loan interest.

  • A person can claim a deduction of up to Rs. 25,000 on the premium paid towards health insurance under section 80D of the 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 starts 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 fulfill 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.

Income Tax-Saving Tips

As important earning a decent income for your livelihood, it is also important to save that income wherever and whenever possible. Therefore, the Government of India provides income tax saving benefits under various Sections to help individuals of different ages attain maximum profit.

Here are some top investment options one can opt for depending upon the life stage they are in:

  1. Tax Saving Investment for Single Income Earner or Unmarried Individual

    It is essential to start saving at the right age to have a bright and financially independent future. For unmarried or single earning individuals in a family, here are some of the best tax saving investment options available:

    • Buy Unit Linked Insurance Plans (ULIPs) for a safe and steady return in the future.

    • Invest some amount of your earnings in Public Provident Funds (PPF).

    • Buy term insurance of Sum Assured of a minimum of 20 times of the individual’s annual earnings.

    • Equity Linked Savings Scheme (ELSS) Mutual Funds can also be a wise investment option to reap long term benefits.

    • Have a safe bet by investing a minimum of 10% of your annual income in the National Pension Scheme (NPS).

    • Investment in house property can also help in saving tax up to Rs. 2,00,000 under Section 24(B) of the Income Tax Act.

    • Up to Rs. 1,00,000 can also be saved under Section 80D by:

      • Purchasing a Mediclaim health insurance for self

      • Mediclaim health insurance for parents

  2. Tax Saving Investment Options for Married Couples

    If both parties are earning in a marriage, they can claim up to a whopping amount of Rs. 8,50,000 as deductions by putting their money in different investments and insurances like:

    • Buy separate Term Insurances of Sum Assured of a minimum of 20 times of each individual annual earning can save up to Rs. 3,00,000 under Section 80C of the Income Tax Act, 1961.

    • Purchase Unit Linked Insurance Plans (ULIPs) for a safe and steady return in the future.

    • Invest some of the earnings individually in Public Provident Funds (PPF).

    • Have a safe bet by investing a minimum of 10% of your annual income in the National Pension Scheme (NPS).

    • Equity Linked Savings Scheme (ELSS) Mutual Funds can also be a smart investment option to reap long term benefits.

  3. Tax Saving Investment Options for Parents

    If you are a parent, you can claim:

    • Up to Rs. 2,00,000 can also be saved under Section 80D by:

      • Purchasing a Mediclaim health insurance for self

      • Mediclaim health insurance for parents

    • Investment in house property can also help in saving tax up to Rs. 4,00,000 under Section 24(B) of the Income Tax Act.

    • Invest in Child Plans

  4. Tax Saving Investment Options for Senior Citizens

    It is highly crucial to have a decent financial corpus after retirement as you are no more earning a regular monthly income to carry out your expenses. Therefore, to have a peaceful retirement, an individual must start investing in the following investment options:

    Unit Linked Investment Plans (ULIPs) are a game-changer in all stages of life. To create good wealth in the future, ULIPs can be beneficial as it offers tax benefits under:

    • Exemption of tax up to Rs. 1,50,000 under Section 80C on all premiums

    • Tax-free withdrawals at the time of maturity under Section 10D

    Apart from ULIPs, annuity schemes such as the “Senior Citizen Savings Scheme” turn out to be pretty popular and beneficial amongst the country’s senior citizens. Available to citizens only above the age of 60, it offers tax benefits under Section 80C and also allows premature withdrawals without any deductions.

Tax Saving Investments - FAQs

  • Q1: Which investment instruments are tax-free?

    A. 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: Do I have to pay taxes on the investments?

    A. 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 the 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.
  • Q3: How many tax-free investment instruments can one have?

    A. 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 Sections.
  • Q4: How will I be able to pay less tax on higher income?

    A. You can save taxes by making investments in tax-free investment instruments. In this way, you will be able to pay lesser taxes on high income.
  • Q5: How much should I save for my taxes?

    A. You can claim a tax deduction of up to Rs.1 Lakh 50 Thousand towards the premiums that you have paid as per Section 80C of the IT Act, 1961.
  • Q6: What investments come under Section 80C of the Income Tax Act?

    A. 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
  • Q7: What is the maximum limit of investment under Section 80C?

    A. You can invest a maximum of Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961 from your total taxable income.
  • Q8: How can I reduce my taxes legally?

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