Tax Saving

5 Best Tax Saving Investment Options

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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 an investment - 

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

Before we move on to our list of 5 best tax saving investments options for the year 2017, 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 2017. 

1. Life Insurance

Life Insurance is not a pure form of investment 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.

2. Health Insurance

Some of you might not agree with a health insurance plan being counted as an tax saving investment 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 worthful 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 extendible 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

Equity Linked Saving Scheme (ELSS) Mutual Funds are specially designed for tax saving purposes. 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

NPS is one of the very few investment 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

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 a 8% rate of return and that too on a guaranteed basis as it's a govt. scheme. Such unique benefits make PPF the best tax saving investment 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 options.

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