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Tax Free Investments

Does the taxman keep you awake all night? Don’t worry. There are plenty of avenues where you can park your savings with ample tax-benefits. As a smart investor, it is advisable to make investments in tax-saving instrument on a regular basis throughout the year. This will even out the financial burden over the year. Also, you should look for an investment which not only saves tax but also helps you generate tax-free income. Here are a few tax-free investments which are suitable for all investors looking to save tax.

Best Tax Saving Investment Options

ELSS

An Equity Linked Savings Scheme is a type of tax-saving mutual fund which comprises primarily of equity and equity related instruments. This mutual fund is an excellent option for obtaining the dual benefits of tax-saving and wealth generation. Under an ELSS, you can claim a tax deduction of up to ₹1,50,000 on invested amount as mentioned in Sec 80C of the Income Tax Act, 1961. Also, an ELSS Mutual fund investment comes with the shortest lock-in period of 3 years. Note: ELSS is a mutual fund scheme, hence, it will attract a tax of LTCG and STCG.

Public Provident Fund

The public provident fund has been one of the most popular investment avenues for decades now. The PPF comes with guaranteed returns and the interest accrued along with maturity amount is completely tax-free. The PPF is a 15 years scheme with an option to extend it further by 5 years. The minimum amount of investment required to keep your account active is ₹500 and the maximum investment amount which can be deposited in a financial year is ₹1.5 lakh. You can open a PPF account with any private/nationalized bank or at the post office. A PPF is suitable for investors who are risk-averse and are not comfortable with volatility. The rate of interest for PPF currently stands at 8%.

Employees Provident Fund

This is another tax saving instrument suitable for the salaried working class. An EPF not only helps you save tax but also helps you accumulate a large tax-free corpus for retirement. Under an EPF scheme, you are required to make a contribution of 12% of your basic salary in the EPF account. An equal share is contributed by the employer as well. You also have an option to increase one’s contribution up to 100% of basic and DA. Under EPF, you can avail a tax benefit of up to ₹1,50,000 under Sec 80C of the Income Tax Act 1961. The rate of return is decided by the government and currently stands at 8.55%.

Unit Linked Insurance Plan

A ULIP is an investment cum insurance plan which comes with the dual benefit of life cover and investment in different funds. It comes with a long term investment horizon making it suitable to achieve financial goals such as your child’s education/marriage etc. The minimum lock-in period for a ULIP is 5 years and the benefits paid under death or maturity is completely tax-free. A ULIP will help you channel your savings in to the right combination of life cover and investment funds. Additionally, you can revise the entire investment portfolio in case you are not satisfied with the performance of the fund.

Sukanya Samriddhi Yojana

This is a deposit scheme established by the Indian government as a part of the ‘Beti Bachao Beti Padhao’ campaign. This scheme comes with a sovereign guarantee and holds the ‘EEE’, exempt-exempt-exempt tax status. Under this plan, you can open an account in the name of your girl child with a minimum deposit of ₹1000 while a maximum amount of ₹1,50,000 for a financial year. Currently, this scheme offers the highest tax-free return of 8.5%.

Life Insurance Plans

These are traditional insurance plans such as endowment, moneyback or a whole life insurance scheme. Apart from life cover, these plans come with a fixed term and sum assured. The premiums are calculated on the basis of age at entry, life coverage and the time period of coverage. You are required to pay premiums either throughout the policy tenure or for a specified time period. Premiums paid towards life insurance plans of up to ₹1,50,000 qualifies for tax-benefits under Sec 80C of the Income Tax Act, 1961. The death and maturity amount paid is also tax free under Sec 10(10D).

Senior Citizen Saving Scheme

As the name suggests, this is a scheme designed especially for senior citizens of India who are above the age of 60 years. SCSS offers the dual benefit of guaranteed income and tax-benefits. Any individual post 60 years and above or individuals who have opted for Voluntary Retirement Scheme (VRS) in the age bracket of 55-60 years are eligible for SCSS. Under this plan, you can invest a maximum amount of ₹15 lakhs on an individual or joint basis. The tenure of this scheme is 5 years with an option to extend it for another 3 years and a deduction of up to ₹1.5 lakh can be claimed under Section 80C of the Income Tax Act, 1961.

National Pension Scheme

The National Pension System is a social security initiative started by the government to provide the very benefits of a pension post retirement to all the citizens of India. This is a voluntary investment scheme which provides tax benefits under Sec 80C and 80CCD of the Income Tax Act, 1961. The NPS is an excellent investment option for individuals who intend to retire early and have a low risk-appetite. The NPS has been around for over a decade and it has successfully delivered close to 8%-10% in annual returns.

Bank FDs

This is a security deposit similar to a Fixed Deposit. The only difference is that the time period required for this FD is that of 5 years for it to become successfully eligible as a tax-saving instrument. The interest rate offered by bank FDs is standard and declared by the banks which can change every financial year or quarter.

FAQs on Tax Free Investments

Are income bonds tax free?

Yes, the income you earn in the form of interest in an income bond is completely free from income tax deductions.

Are muni funds tax free?

Muni funds are not available in India.

Are municipal bonds guaranteed?

They are same as muni funds and are not available in India.

Are T bills tax free?

Yes, treasury bills issued by RBI are tax free as no TDS is deducted from the same.

Are there any tax free investments?

  • Yes, there are multiple tax free investments available in the Indian economy. To name a few - ELSS, SCSS, PPF, PF, etc.

Are there tax free CDs?

No, you have to pay tax on the interest earned by the Certificate of Deposit.

Do I have to pay taxes on investments?

Yes, you are required to pay taxes on your investments. The tax levied depends on the type of investment where the money is invested.

Do you have to pay taxes on index funds?

Yes, you are required to pay taxes on the dividends and capital gains earned by the index fund.

How are you taxed on investments?

This depends upon the type of investment selected. The tax payable varies from STCG to LTCG tax or as per the applicable Income Tax slabs.

How can I make tax free money legally?

You can make investments in the approved tax-free instruments to make tax free money legally

How can I save tax?

One can save tax by investing a part or whole of their taxable income in approved tax free instruments.

How do I invest pre-tax?

You can make investments at the beginning of the financial year in order to save pre-tax.

How many tax free investments can I have?

There is no such limit on the tax free investments which can be availed by an individual. But, there is a limit to the deduction you can claim under the different Sections of the Income Tax Act, 1961.

How much do tax free bonds pay?

Tax free bonds pay between the ranges of 7.14% to 8.3% with tenures of 5|10|15 years.

What are the best tax free municipal bonds?

Not Applicable in India

What are the investments under 80C?

The following investments come under Sec 80C of the Income Tax Act, 1961 - PPF, NSC, Life Insurance, Pension Fund, SCSS, ELSS Mutual Funds, 5 year bank or post office deposit scheme/FD.

What investments are tax deductible?

You can claim deductions of up to ₹1,50,000 towards premium paid under Sec 80C of the Income Tax Act, 1961.

What is tax efficient investing?

An investment scheme which helps save taxes and reduce the taxable income of the tax payor.

What is tax free income?

Income which does not come under any tax bracket or is not eligible for any form of Tax deduction is considered as tax-free income.

What is tax free MF?

A mutual fund scheme that helps an investor to save tax on the investment scheme is called Tax Free Mutual Fund. Equity Linked Savings Scheme (ELSS) of Mutual Funds are tax free.

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