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Best Tax Saving Investment Options

Savings are our financial cushion for tomorrow and it is a practice almost everyone follows. Sure, it is harder for some people to manage savings than others. You could want to use your savings to pay for your dream house, your dream car, or to fund the higher education of your child. Your savings play a crucial role in the growing needs of you and your family. Many people start contributing to their retirement fund from the first pay check onwards. We sacrifice on spending today so that a portion of our salary goes into savings to make our future even better. But, ‘Tax’, is a component which takes away a prominent amount of your savings.

A lot of people often get entangled in this vicious web of tax. The tax filing season is feared by everyone. It’s the time of the year when people are in a frenzy over how much they will have to pay in tax. It can be overwhelming, especially for those who have just started earning. But, you must understand the intricacies as it is your money which is getting paid in taxes.

There are a bunch of ways in which you can save the amount of tax you pay. These ways can be broadly divided into two categories, namely expenses and investments. Expenses such as tuition fees of kids, rent, repayment of home loans, medical expenses, etc. can substantially bring down your total income which is eventually taxed. The second category refers to specially strategised tax saving investments in the market which are very efficient at their job to cut your total amount paid in tax. This article will highlight ten of the best tax saving investment plans for you. Although they all help in saving tax, they are very different in nature with different features, returns, time horizons, and they even work differently.

Top 10 Best Tax Saving Investment Plans

Here is a list of top few investment plans you can opt to save tax.

Life Insurance

A life insurance is a safety net for your family which provides financial protection to them in the unfortunate event of your death. The insurance policy takes the financial burden off your shoulders towards your loved ones. You are required to pay timely premiums so that your family can be paid a death benefit. Although a life insurance is not a pure form of investment for tax saving purposes, it does manage to always secure a place in the list of best tax saving investment plans available.

Section 80C of the Income Tax A allows the premiums you pay towards your insurance policy to be deducted from your total income. This in turn reduces your total taxable income and eventually the actual tax paid. The cap for this deduction is Rs. 1.5 lakh. Further, Section 10 (10 D) also exempts survival benefit, maturity benefit, and death benefit from tax.

Public Provident Fund

A Public Provident Fund (PPF) is a long-term savings scheme by the Central Government. It is one of India’s most tax-efficient plans for salaried people and the contributions made towards your PPF account every year are eligible for tax deductions under section 80C of the Income Tax Act, 1961. The deduction limit for these deposits is Rs 1.5 lakh.

PPFs are a gold mine when it comes to tax savings investment plans. Why? Well, PPFs have an EEE or ‘exempt, exempt, exempt’ status which means the PPF account offers investors a triple exemption benefit of tax-free returns, deduction on deposits, and no wealth tax. In addition, the interest earned from PPF deposits are tax-free as well.

Tax Saving Fixed Deposit

A tax-saving fixed deposit is similar to any other fixed deposit where you put in a certain amount of money and you get a guaranteed fixed return every year. There is a lock-in period in which you will not be allowed to withdraw your money. A fixed deposit is usually opted by people who need a guaranteed return every year.

Under Section 80 C, a tax deduction of upto Rs. 1.5 lakh is permitted.

Employee Provident Fund

It is compulsory for employers to deduct a percentage of the employee’s salary and direct it towards the Employee Provident Fund (EPF). The employee and the employer make regular contributions towards the EPF account. The interest rate is based on the employee’s basic pay along with a component known as the dearness allowance in his/her total salary. The employee gets a lump sum amount which includes his/her own and employer’s contribution along with interest on the sum, on retirement.

The employee's contribution towards EPF can be deducted from the total taxable income under section 80C. The maximum limit for tax deductions with respect to EPF is up to Rs 1.5 lakhs.

National Pension Scheme

The National Pension System (NPS) is a voluntary defined contribution pension system like PPF and EPF enjoys the EEE (Exempt-Exempt-Exempt) status in India where entire corpus escapes tax at maturity and entire pension withdrawal amount is tax-free.

Health Insurance

A health insurance makes sure you can tackle health problems that come your way more efficiently with a financial cushion. Health being the most important aspect of life, cannot be avoided. And, when a health problem comes your way, the insurance policy will shield you financially.

Section 80D permits you to avail income tax exemption, based on the premiums paid for one or more health insurance policies purchased for your family (spouse & children) and parents. A policyholder can avail a deduction up to Rs. 25,000 annually against the premium paid. This deduction can be availed on the health insurance availed for yourself, your spouse, and dependent children. The limit will increase up to Rs. 50,000 in case you or your spouse are above the age of 60. If you are paying for a health insurance plan availed for your parents you can claim an additional amount of Rs. 25,000 and in case parents are senior citizens the limit becomes Rs. 50,000. This limit also includes coverage of Rs. 5,000 for expenditure on health check-ups of the family members, including parents, spouse, and dependent children.

Term Insurance

Term Insurance is a life insurance plan that provides financial coverage to the beneficiary of the insured person for a defined period. In the event of the death of policyholder during policy term, the beneficiary can claim death benefits from the insurance company. Term life insurance or term assurance provides coverage benefits as a lumpsum or at a fixed rate of payments for a limited period of time. Term insurance policies offer deductions under Section 80C of the Income Tax Act along with further deductions up to an amount of Rs 1.5 lakhs. Death benefits received by the nominee are tax free as well.

Senior Citizens Saving Scheme

The Senior Citizens Savings Scheme (SCSS) is mainly for the senior citizens of the country above the age of 60. This long-term savings opportunity is great for senior citizens as it provides a regular income stream with tax saving abilities.

A tax deduction of up to Rs 1.5 lakh can be availed under Section 80C. In addition to this, there is no tax liability on the principal amount if it is withdrawn by the legal heir or nominee after the death of the account holder.

Unit Linked Insurance Plans (ULIPs)

Unit Linked Insurance Products (ULIPs) give you an insurance cover as well as an investment bundled up in a single investment plan. A ULIP gives you the option of investing in stocks, bonds, or mutual funds.

This is how it works. When you invest in a ULIP, the company invests part of the premium in equity, debt, or other securities whereas the balance amount is utilised to provide an insurance cover.

The premium paid towards this type of policy is eligible for a tax deduction under Section 80C. Further, the returns out of the policy on maturity are exempted from income tax under Section 10(10D). You could call this a dual benefit.

Equity-linked Savings Scheme (ELSS)

An equity linked savings scheme (ELSS) is sort of an equity mutual fund which invests at least 80% of its total amount in equity and equity-related instruments. An ELSS has a mandatory lock-in period of 3 years during which you cannot withdraw any amount. An ELSS is eligible for tax exemption under section 80C of the Income Tax Act, which allows a maximum tax exemption of Rs. 1.5 lakh.

FAQs on Ten Best Tax Saving Investment Options

Are all ELSS tax free?

Your investment in ELSS schemes is eligible for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act and 10 % Long Term Capital Gain (LTCG) Tax will be applicable on capital gains over Rs. 1 lakh in a single financial year.

Are savings accounts tax free?

The interest you receive upto Rs. 10,000 on your savings account is exempted from tax.

Do you pay taxes on index funds?

Yes, the capital gains are taxed at 10% Long Term Capital Gain (LTCG) Tax.

How can I get tax free income?

The following types of income are totally tax free:

  • Agricultural income.
  • Interest income eligible for tax exemption.
  • Scholarships and awards.
  • Gifts received.
  • Money received from PPFs, EPFs and NPFs.
  • Special allowances and benefits.
  • Leave Salary.
  • Gratuities.
  • Receipts from Hindi Undivided Family.

How can I save tax other than 80C?

Section 80C of the Income Tax Act related to the different types of deductions of income tax which you may get by investing. There are other sections which help save tax too. Here are a few of those items which may help you to save tax:

  • Medical treatment – Section 80 DDB
  • Donations – Section 80 G
  • Health insurance – Section 80 D
  • Home loan interest – Section 80 EE
  • House rent allowance – Section 80 GG
  • Education loan interest – Section 80 E

How can I save tax?

There are many ways to save tax which can broadly be categorised under the following:

  • Tax saving expenses
  • Tax saving investments

How do I invest my tax return?

It totally depends on you. There is an ocean of investment opportunities you can choose from. It depends on your objectives and the vision you have for you and your loved one’s lives.

How much should I invest in PPF to save tax?

A tax deduction of upto Rs. 1.5 lakh can be availed on investment in a PPF during a financial year.

How much should I invest to save tax?

Firstly, an investment would save different amounts of tax for people in different tax brackets. Thus, know which tax bracket you fall in. Secondly, know the limit to which you can deduct your investment from your total taxable income. If you are investing just for saving tax, invest only till this upper limit.

For example, since an investment is eligible for a tax deduction only till 1.5 lakh, you should invest only 1.5 lakh in that financial year. This 1.5 lakh would be deducted from your total income upon which you will be taxed as per your tax bracket.

Is FD tax free?

If the interest received goes over Rs. 10,000 in a financial year, tax deduction at source (TDS) would be applicable. However, Under Section 80 C, your investment is eligible for a tax deduction of upto Rs. 1.5 lakh.

Is investment in mutual fund tax free?

Equity Linked Saving Schemes (ELSS) are the most efficient tax-saving instruments amongst all mutual funds.

Is PPF a good investment?

Yes, it is a good long term investment and effective in tax saving.

Is RGESS discontinued?

Yes, it was proposed in the Budget of 2017 to phase out Rajiv Gandhi Equity Savings Scheme (RGESS).

What are tax savings?

Tax savings are the amount of money you save in taxes by applying deductions.

What are the best plans for investment?

Your best investment option will not be someone else’s best option. It differs from person to person. The most popular investment plans are mutual funds, PPFs, real estate, gold, NPS, direct equity, and fixed deposits.

What investments are tax free?

No, not all investments are tax free. The best and most efficient tax saving investments are listed above in this article.

What is ELSS plan?

An equity linked savings scheme (ELSS) is a sort of an equity mutual fund which invests at least 80% of its total amount in equity and equity-related instruments. An ELSS has a mandatory lock-in period of 3 years from which you cannot withdraw any amount.

What is NSC scheme?

National Savings Certificate (NSC) is a tax saving investment backed by the Government of India which pays a fixed interest and is opted for by investors who prefer guaranteed return over high risk.

What is a saving investment plan?

It is a plan which helps you save money and make it grow systematically over a certain period.

What is tax saving investment?

A tax saving investment is an investment which is eligible for a tax deduction from your total taxable income.

What is the best investment to save tax?

There are many options you can choose from to help save tax which includes fixed deposits, PPFs, EPFs, health insurance, life insurance, and many more.

What is the best tax saver mutual fund?

That would be the ELSS which is very efficient for saving tax.

What is the tax free amount for 2018?

For an individual below the age of 60, an income of upto Rs. 2.5 lakhs is exempted from tax. For someone between the age of 60 and 80, an income of upto Rs. 3 lakhs is exempt from tax. And if you are above the age of 80, you do not have to pay tax if your income is less than Rs. 5 lakhs.

What will come under 80C?

The different deductions under 80 C are as follows:

  • Life Insurance
  • PPF
  • ELSS
  • Bank Deposit
  • Senior Citizens Savings Scheme
  • National Savings Scheme
  • Home Loan Principal Repayment
  • Stamp Duty and Registration Charges

Where can I invest to get tax exemptions under Section 80C?

You can invest in any investment plan which is aligned with your investment objective, expectations, and time horizon, to get tax benefits under Section 80C, of the Income Tax Act.

Which bonds are tax exempt?

There are many tax efficient bonds introduced by the Government. Here are a few of those:

  • Indian Railways Finance Corporation N1 Series
  • HUDCO N2 Bonds
  • HUDCO N3 Bonds
  • National Highways Authority Of India
  • REC N6 Bonds

Which is the best tax savings scheme?

As said before, the scheme that works best for you may not do so for someone else. You need to thoroughly go through every investment plan, understand how it works, know the upper limit of the tax deduction, see if it checks all the points on your checklist, and then finally make your choice.