5 Best Tax Saving Investment Options
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Tax Saving Investments

Benjamin Franklin once quoted 'In this world nothing can be said to be certain, except death and taxes'.

But you need not be despaired, there are many smart ways to make your way around the tax trap and enjoy the maximum savings possible. For most of us, tax planning is a let's-do-it-later affair. We all have a tendency to start planning for investing in tax saving instruments only when the financial year is near its end. But this doesn't leave much room for a prudent investment planning. A smarter approach is to start investing in the early quarters of the financial year, so that you get time to prudently plan how to get the most of your tax saving investments options. By being proactive, you also minimize your chances of making a wrong investment in haste.

One mistake that investors often make is choosing an investment just for the sake of availing tax benefits. Ideally, an investor should look out for 4 factors while making a tax saving investments -

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

Before we move on to our list of 5 best tax saving plans for the year 2018, we would like you to know about the key section of the income tax act, section 80C. Most forms of tax saving investments options work under the parameters of section 80C of the Income Tax Act. As per this section, the deduction you make towards certain investments is tax deductible. Such investments include ELSS (Equity Linked Saving Scheme), Fixed Deposits, Life Insurance, Public Provident Fund, National Savings Scheme and Bonds. The upper limit of this deduction is 1 lakh. It doesn't matter if you invest in one or more of the above investments, the deduction will stop as soon as it reaches its limit of Rs 1 lakh. There are a very few investment avenues that provide further tax deduction, over and above this limit. Let's get on to the 5 best tax-saving investment options in India.

Best Tax Saving Investment Options

Plans

Interest (%)

Minimum Investment

Maximum Investment

Features

Tax Benefit

Life Insurance

0-6%

 NA

No upper Limit

Have a Lock in Period of maximum 5 years

Offer tax exemption under section 80C and 10(10D) of Income Tax Act

 

Health Insurance

NA

NA

No upper Limit

 

Tax benefit under section 80D of Income Tax Act

PPF      

8.50%

Rs500

Rs. 1.5 Lakhs

Have a lock in period of 15 years

Up to Rs. 1.5 lakhs investment is tax free under Section 80C of the Income Tax Act

ELSS

Interest rate is not fixed

-

-

Lowest lock in period of 3 years

Investment towards ELSS is Tax Free under Section 80C

Bank FD

5.5%-7.5%

Rs. 500

No limit

Lock-in period of 5 years

Offers tax deduction under Section 80C

Senior Citizen Saving Scheme

8.5%

Rs. 500

Rs 1.5 Lakhs

Designed to provide financial security to the senior citizen.

Tax deduction under Section 80C

National Pension Scheme

8-10%

Rs. 500

No limit

Low cost investment

Tax Deduction under Section 80C

Unit Linked Insurance Plan (ULIPs)

NA

Depends on the Plan

Depends on the Plan

Offers the combined benefit of life insurance and investment

Offer tax exemption under section 80C and 10(10D) of Income Tax Act

Sukanya Samriddhi Yojana

8.1%

Rs.250

Rs.1,50,000

Specifically designed for girl child as a part of ‘Beti Bachao Beti Padao’.

Offer tax exemption under section 80C ) of Income Tax Act

Employee Provient Fund

8.55%

12% of Basic Salary + Dearness Allowance

12% of Basic Salary + Dearness Allowance

Helps to create a retirement corpus

Under section 80C of Income Tax Act

1.  Life Insurance Tax Saving Investments

Life Insurance is not a pure form of tax saving investments, yet somehow owing to its dual edged benefits; it makes it to the top of our list. It gets you a life cover that acts as a financial cushion in case of a contingency. Moreover, under section 80C of Income Tax Act, the premium you pay on a life insurance plan is deductible from your total income, thus lowering your taxable fraction. The upper limit for this deduction is Rs 1 Lakh. Even the more evolved forms of life insurance save the tax for the investor under different sections.  The premiums paid for ULIPs (Unit Linked Insurance Plans) are exempted from taxes under section 80C.

But this is not all, under section 10(10D), the lump sum that is paid to the beneficiary in case of an eventuality is not taxable. If it's a pension plan, the 1/3rd maturity amount paid out as lump sum is not taxable. Though, the rest 2/3rd fraction paid out as annuity is taxable.

There are several life insurance plans available in the market, namely:

  • Term Plans
  • Endowment Plans
  • Unit Linked Insurance Plans or ULIPs
  • Money Back Plans

2.  Health Insurance Tax Saving Investments

Some of you might not agree with a health insurance plan being counted as a tax saving investments option, as it offers no perky returns like the other forms of investment. But, might we mention, the value you get from health insurance coverage makes it much more worth than any other form of investment.

As per section 80D, you get to enjoy a tax deduction on the premium that you pay for the health insurance plan. The upper cap for this deduction is Rs 15,000 and is extendable up to Rs 20,000 for senior citizens. So, if a person gets a health plan for himself and for his parents, he can enjoy a deduction of up to Rs 35,000 on his taxable income. However, section 80D is not applicable to the group health insurance given by your employer.

If you have opted for a personal accident rider with your health plan, the lump sum paid, in case the insured suffers a disability, is not taxable.  

3.  ELSS Mutual Funds Tax Saving Investments

Equity Linked Saving Scheme (ELSS) Mutual Funds are specially designed for tax saving purposes and are considered one of the most sought after tax saving investments options. Being market linked product they are a high risk products but also offers the potential of high returns. We have already counted it above among the investments that save taxes under section 80C. There are two reasons why it makes to our list with flying marks.

It is one of the two tax saving investments options that are equity based (the other one is ULIP)

It boasts of the shortest lock in period (3 years) among its class of investments

There's one more perk that ELSS offers. The investment in an ELSS can also be made through a SIP (Systematic Investment Plan) wherein you get to spend a small fixed fraction every month instead of paying a heavier sum altogether. Thus, an ELSS invested through a SIP makes the overall investment easy and affordable. A SIP multiplies the money better than other forms of investment through effect of averaging and the power of compounding.

4.  National Pension Scheme Tax Saving Investments

NPS is one of the very few tax saving investments options that let the investor surpass the 1 lakh limit of deduction set by the section 80C. Under NPS, the percentage of the basic salary (up to a max of 10%) that your employer contributes towards your NPS is tax deductible. However, your contribution towards NPS will still be governed by the section 80C, hence; will abide by the 1 lakh limit.

5.  Public Provident Fund Tax Saving Investments

It is a long term saving scheme issued by the Central Government. Under section 80C, the contribution made towards PPF is tax deductible. The upper limit on this contribution is Rs 70,000. Moreover, the interest earned and received at the maturity is absolutely tax free. It assures the investor an 8% rate of return and that took on a guaranteed basis as it's a govt. scheme. Such unique benefits make PPF the best tax saving investments options of all the time. The only glitch to PPF is that it sets a lock in period of 15 years, so it is not good for those looking for a short term tax-saving investment.

NSC (National Saving Certificate) has all the features as a PPF has. It is risk free, yields optimal guaranteed returns and saves tax under section 80C. But the reason NSC didn't make it to our list is because unlike PPF, the interest received in former at maturity is taxable.

Out of this list, we would like to mention one more financial instrument here - Loans. Yes, we know loan is not a form of investment but it is a very efficient tax saving instrument. Here's how, as per section 80E of the Income Tax act, the interest component of the repayment on the higher education loan is tax deductible. Under section 80C, the monthly Home Loan EMI made towards the principal component of the loan is exempted from taxation and most importantly under Section 24; the interest on the home loan is also exempted from tax. Seeing such unique benefits, it seems loans deserve to be in the league of best tax-saving investment plans.

Apart from the above mentioned schemes there are various other tax saving investments rolling out in the market. They are:

  • Fixed Deposit Schemes
  • Senior Citizen Savings Scheme (SCSS)
  • Rajiv Gandhi Equity Saving Scheme (RGESS)
  • Voluntary Provident Fund (VPF)
  • National Saving Certificate (NSC)

6. Bank Fixed Deposit Tax Saving Investments

Bank FDs are security deposits which are similar to Fixed Deposit. The only difference is that the tenure of investment applicable in Bank FDs is for 5 years. Bank FDs offers tax-free income.  As one of the tax –free investment options, this plan is best suitable for individuals who have a low-risk appetite and wants to save money over a long-term period.  Under this tax saving investments option, one can avail tax benefit up to the maximum investment of Rs.1.5 lakh under section 80C of the Income Tax Act. The Banks sets the interest rate of Banks FDs which can change 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 FDs have tenure of only 5 years, it does not allow premature withdrawal.

7. Senior Citizen Savings Scheme Tax Saving Investments

Senior citizen Savings Scheme is a government-backed savings scheme which is specifically designed to provide financial security to the senior citizens. Individuals above 60 years of age are eligible for invest in SCSS.  Under this scheme, the investors are eligible to make a one-time deposit of minimum investment amount of 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).

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 deduction of up to Rs1.5 lakhs are applicable for  tax deduction at source under section 80 C of Income Tax Act .  As compared to the other tax saving investments options, senior citizen saving scheme offers the highest interest rate of 8.7% per annum. 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

8. ULIP Tax Saving Investments

ULIP plans are investment cum instrument product which offers the combined benefit of life insurance and investment. Unit-linked Insurance plans offer a maximum return in a long-term and come with a lock-in period of 5 years. In ULIP plans the premium paid towards the policy and the returns are tax exempted under section 80C and 10(10D) of Income Tax Act. Moreover, ULIP plans also offer the option of free fund switched wherein the investor can switch the fund in case they are not satisfied with the performance of the fund. ULIPs offer customers a choice to finance on various investment tools like bonds, mutual funds and stocks as well as insurance cover. ULIP plans can be classified as:

  • ULIP for Retirement
  • ULIP for Wealth Creation
  • ULIP for Health Benefit
  • ULIP for Child Education

ULIP plans offers the investors the potential of good return by making investment in equity, debt and market linked instruments. Depending upon one’s own risk appetite and investment limit, the investors can invest in the plan in order to achieve maximum returns.  It is considered as one of the most transparent investment product. The charge structure, value of investment, internal rate of return, etc. are shared before hand with the prospective customer. NAV’s on daily basis are shared on life Insurance Company’s website.

9. Employee Provident Fund Tax Saving Investments

This is another tax saving investments instrument suitable for salaried individuals. As a government-backed investment option in EPF account the employer and employee both contribute 12% of (Basic salary + Dearness Allowance). The employees’ contribution of 12% is completely credited in the EPF account, whereas out of 12% of the contribution of employer's, 3.67% is credited in the Employee Provident Fund account and the remaining 8.33% is credited in the employee pension scheme.

Under EPF account tax benefit of up to Rs.1.5 Lakh can be availed under section 80C of Income Tax Act.  Currently in EPF account the PF interest rate of 8.55% is applicable.  In EPF account the employee can make partial withdrawal for the purpose of education of self, sibling, marriage or children, emergency medical expense of spouse, children, dependent or self parents. In EPF account, the individual can also make withdrawal in case of repaying of house loan, provided he/she completes 10 years of service.

10. Sukanya Samriddhi Yojana Tax Saving Investments

Sukanya Samriddhi Yojana is a small deposit scheme which is specifically designed for girl child launched as part of ‘Beti Bachao Beti Padhao’ campaign.  The Plan currently offers an interest rate of 8.1% and provides the benefit of tax exemption.  One can open a Sukanya Samriddhi Yojana after the birth of girl child till she turns 10. Under this scheme, the one can make a minimum deposit of Rs.1000 and can make a maximum deposition of Rs.1.5 lakh during an ongoing financial year.

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% and the maturity benefit offered under the policy is non-taxable. As a long term investment option it also provides the benefit of compounding. Moreover, the tax benefit can be availed under section 80C of the Income Tax Act.

Any individual can invest in Sukanya Samriddhi Yojana through the post office or designated branched of participating private or public bank.  In order to invest in SSY scheme, the individual will require submitting the KYC document such as aadhaar card, passport, etc. along with the thoroughly filled form and initial deposit of check/draft.

Conclusion:

The aforementioned best tax saving investments schemes would help in making investments under the section 80C up to Rs. 1.5 lakhs. You do not have to consider all the options. You can take some of the above-mentioned tax saving investment schemes which suits you depending on the duration of your investment and the features that are indicated above.

FAQs- Tax Saving Investments

Q1: Which investment instruments are tax-free?

Ans: 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?

Ans: 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?

Ans: 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?

Ans: 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?

Ans: 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: Which is the best tax saving investment instrument?

Ans: There is a number of tax saving investment instruments:

  • PPF
  • ELSS
  • EPF
  • Sukanya Samriddhi Yojana
  • EPF
  • Life Insurance Plans
  • ULIPs
  • National Pension Scheme
  • Senior Citizen Saving Scheme
  • Bank Fixed Deposits
  • NPS

Q7: How much should I save for my taxes?

Ans: 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.

Q8: What investments come under Section 80C of the Income Tax Act?

Ans: 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

Q9: What is the maximum limit of investment under Section 80C?

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

Q10: How can I reduce my taxes legally?

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