As an investor, you should look for investment options that not only help you to save income tax, but also generate tax-free income. Here is the list of best investment options that can help you save tax on your investment and income earned from investment.
While choosing the right tax saving investment option, you should consider several factors such as safety, liquidity, and returns. However, it is equally important to understand how the returns from such an investment would be taxed. If the income earned from these investments is taxable, the scope to make money gets constrained as taxes will eat a significant portion of your returns.
Here is a list of a few tax saver investments that not only help you save tax, but also help you to earn tax-free income. However, they are not the same in terms of features and asset-class. So, making the right choice is important.
ELSS are equity mutual funds with two differentiating characteristics. Firstly, the invested amount qualifies for tax benefits under Section 80C of the Income Tax Act, 1961 up to Rs.1.5 lakh. Secondly, an ELSS mutual fund comes with the shortest lock-in period of three years. The returns on ELSS mutual funds are neither fixed nor assured, and they depend on the performance of the equity market. It is important to note that ELSS is a mutual fund scheme, and it will attract long-term capital gain tax.
The Public Provident Fund (PPF) has been one of the most popular investment options for decades. It comes with guaranteed returns and the interest earned along with the maturity amount is entirely tax-free. The Public Provident Fund is a 15 years scheme where investors have an option to extend it for five years further. The minimum amount to be invested in keeping your PPF account active is Rs. 500 per year and the maximum investment amount which can be deposited is Rs. 1,50,000 in a year. You can open a PPF account at any nationalised bank or the post office. It is suitable for those who do not want volatility in returns. The interest rate is subject to change every three months. Currently, it offers 7.9 percent interest rate on investment.
Employees’ Provident Fund (EPF) is another tax saving investment option suitable for the salaried working class. An EPF not only helps you to save tax, but also help you to accumulate a large tax-free corpus for retirement. Under an EPF scheme, you need to contribute 12% of your basic salary. The employee and the employer contribute an equal share. In EPF, you can also contribute up to 100% of your basic salary. Under the EPF scheme, you can avail tax benefit of up to Rs. 1.5 lakh under Section 80C. The government decides the interest rate on EPF scheme.
ULIP is a hybrid product i.e., a combination of insurance and investment. ULIPs not only provide life insurance, but also help you to invest your savings into various market-linked assets to meet your long-term financial goals. Most ULIPs offer five to ten fund options with different asset allocation between debt and equity. A ULIP can have a term of 10 to 25 years; however, the lock-in period is 5 years. The fund value after the lock-in period or on maturity is tax-free. Any switching between fund options, irrespective of the holding period is exempted from tax. Moreover, the death benefit paid under these plans is completely tax-free.
Traditional life insurance plan could be a whole life plan, an endowment plan or money-back plan. Unlike pure term insurance, they have a saving element in them and generally comes with fixed-term and sum assured. The premiums are based on the age of the policyholder at the time of entry, the life coverage, and the term for which coverage is obtained. Premiums are to be paid every year till maturity. However, some plans may have a limited payment option for a specified term, and the policy continues for long. The premiums paid under traditional life insurance plans qualify to receive tax benefits under Section 80C. The death benefit and maturity value are tax-free under Section 10(10D).
Sukanya Samriddhi Yojana is a deposit scheme introduced by the Government of India as a part of the “Beti Bachao Beti Padhao” campaign. As per the plan, you can open an account in the name of your girl child with a minimum deposit of Rs. 1000, whereas the maximum amount on such deposit is Rs. 1,50,000 per year. The scheme offers the highest tax-free return of 8.4% per annum. The scheme comes with a sovereign guarantee and EEE (exempt-exempt-exempt) status.
As the name suggests, SCSS is designed especially for senior citizens of India with age above 60 years. The scheme offers a dual benefit of tax saving and guaranteed income. Any individual above 60 years, or individuals who have opted VRS (Voluntary Retirement Scheme) in the age bracket of 55 to 60 years, are eligible to participate in SCSS. Under this scheme, you can invest a maximum of Rs. 15 lakhs as an individual or on joint basis. The scheme comes with the term of 5 years and can be further extended up to 3 years. A tax deduction of up to Rs. 1,50,000 can be claimed under Section 80C.
NPS is a social security scheme initiated by the government of India. The primary motive of the scheme is to provide benefits of post-retirement pension to all the Indian citizens. The scheme provides tax benefits under Section 80C and 80CCD. It is an excellent investment option for those who want to retire early and have a low-risk profile. The scheme is popular for over a decade and has successfully delivered good returns.
Tax saving bank FDs are similar to normal fixed deposit. The only difference is they come with a lock-in period of five years. The interest rate offered by bank fixed deposits varies from bank to bank and the banks pays the interest on maturity or a yearly or quarterly basis. The interest earned of five-year bank fixed deposits is liable for tax deductions.