Tax saving investments are an integral part of one’s financial portfolio as they offer tax deductions under Section 80C and Section 10(10D) of the Income Tax Act, 1961. Considering the importance of these investments, people frequently wish to invest. However, some people are not keen enough to invest due to a low rate of return on investment and the associated risk factor.
As the tax-saving starts from the new financial year, smart investors have already started looking for tax saving investments, which not only provides tax-free income but also offers the benefit of tax exemption. In India, there are several investment plans to save income tax and enjoy maximum possible returns. Most people start investing in tax-free instruments at the end of the financial year in order to save on income tax. However, a smarter approach is to start investing right from the beginning of the financial year, so you get adequate time to plan your investments and avail maximum returns from different tax-saving instruments.
Section 80C of the Income Tax Act plays a key role when it comes to saving tax on investments. As per this section, investments made under different schemes are eligible for tax deductions up to Rs. 1,50,000. Such investment plans include ELSS, Fixed deposit, PPF, life insurance, NSC, etc. There are very few investment options that provide a further tax benefit over and above this limit. Let's have a look at some of the best tax saving investment plans for investors to park their money.
| Investments | Returns | Lock-in period |
|---|---|---|
| ELSS funds | 15% - 18% | 3 Years |
| National Pension Scheme (NPS) | 12% - 14% | Till Retirement |
| Unit Linked Insurance Plans (ULIPs) | Dynamic ranging between 8% to 15% | 5 Years |
| Public Provident Fund (PPF) | 7.1% (for 1st quarter of FY2020-21) | 15 Years |
| Sukanya Samriddhi Yojana | 7.6% | Attaining age 18 years |
| National Savings Certificate | 6.8% (w.e.f April 2020) | 5 Years |
| Senior Citizen Saving Scheme | 7.4% (w.e.f April 2020) | 5 Years |
| Bank FDs | 6% to 7% | 5 Years |
| Insurance | Returns are dynamic from plan to plan | NA |
In simple terms, in case you want to invest in mutual funds and want to save income tax, then ELSS should be your go-to option. ELSS is a diversified equity mutual fund investment option that invests in the capital market and chooses the companies with different market capitalisations. ELSS investors can claim benefits under Section 80C of the Income Tax Act, 1961, and get tax deductions maximum of Rs. 1.5 lakhs in a financial year. When it comes to equity schemes, there are certain risks involved. Investing in ELSS can be risky, and returns can be volatile in the short term. This tax-saving investment option offers liquidity and flexibility and is best suitable for those who have a high-risk appetite.
It is important to note that ELSS does not offer fixed returns, which means that the returns purely depend on the market forces over a long period. It is important to note that ELSS comes with the least lock-in period, i.e., three years. Moreover, returns on ELSS schemes are taxed at 10% with no indexation benefit under the LTCG head, if profits exceed Rs. 1 lakh in a given financial year.
NPS is basically a social security initiative by the Government of India. This pension program is open for all government, private and the unorganised sector employees. The cost of investment in NPS is low. You can start investing in NPS with an amount as low as Rs. 1000 and you can see your investment grow reasonably.
The contribution made up to Rs. 1,50,000 in a financial year can be claimed for tax exemption under Section 80C. You can get an additional tax deduction up to Rs. 50,000 under Section 80CCC(b). Moreover, if the employer contributes 10% of the basic salary of the employee, then even that amount is not taxed.
ULIP is a specially designed investment-cum-insurance product where a part of your investment goes towards life insurance premium while the remaining is invested in the investment fund of your choice – it can be equity, debt, or a mix of both. ULIP can help you save tax under Section 80C. Moreover, when the policy matures, the returns are exempted from income tax under Section 10(10D) of the Income Tax Act, 1961. The best part about ULIPs is that you can switch between funds as per your investment objective during the term of the plan.
Unlike NPS, the rate of return in ULIPs is not fixed because the funds are invested in the combination of equity, debt, and hybrid funds, as per the choice of an individual investor.
One of the major reasons why PPF is still a preferred investment option is because of its secure nature. If you want to invest in a safe investment option with steady and guaranteed returns and also want to save taxes, then you should opt for none other than PPF. One thing to keep in mind before investing in PPF is the lock-in period, which is 15 years. PPF account holders can avail EEE (Exempt, Exempt, Exempt) tax benefit, which means that investment made up to Rs. 1.5 lakh in a year, the returns you earn from PPF, and the corpus when the investment is mature, are all exempted from taxation.
Even though PPF comes with a lock-in period of 15 years, there are provisions under which investors can partially withdraw funds after completing 7 years. The current interest rate of PPF is 7.10%. One of the biggest benefits of investing in PPF is that the risk associated is very low. This is possible because the Government of India backs it.
Sukanya Samriddhi Yojana is a small deposit scheme which is particularly designed for a girl child. The plan is introduced as a part of 'Beti Bachao Beti Padhao’ campaign of the government. The plan currently provides an interest rate of 7.6% ad also offers tax exemption.
The investment made under this scheme is eligible for tax exemption up to a maximum of Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. The accrued interest earned from SSY scheme is compounded annually and is also eligible for tax exemption, and the maturity amount is also exempted from tax.
NSC is a fixed income investment scheme which can be availed from any post office in the country. The plan is specially designed to encourage saving habit among investors and also offers income tax benefits. Similar to PPF, bank FD, NSC is also considered a low-risk investment avenue which offers guaranteed returns on investment.
Investors can claim up to Rs. 1.5 lakh as a tax deduction under Section 80C. And the interest earned from NSC is added back to the original investment amount and is eligible for tax exemption. Upon maturity of the NSC scheme, the investor will receive the entire maturity amount. Since no TDS is deducted on maturity payouts, the investors are required to pay themselves the applicable tax on such proceeds.
Senior Citizen Saving Scheme is a government-backed tax saving investment option which is designed to provide financial safety to the senior citizens above 60 years of age. Under this scheme, individuals are allowed to make a one-time investment minimum of Rs. 1000 and can invest up to Rs. 15 lakhs.
The scheme comes with a period of five years, and the interest income is payable on a quarterly basis. A tax deduction is applicable up to Rs. 1.5 lakh under Section 80C.
Bank deposit, also called a term deposit is similar to other fixed return investment options. Tax saving bank FDs comes with a term of five years. This investment is best suitable for individuals with low-risk appetite and wants to save money over the long term. Bank FDs offer guaranteed returns and also ensure the safety of the investment.
One can claim up to Rs. 1.5 lakh of tax deduction under Section 80C. The banks set the interest rates on such FDs and can be changed on a quarterly basis. Bank FDs have higher interest-earning potential as compared to other types of bank deposits and allows only one-time lump sum investment.
A life insurance policy is also considered as one of the best tax saving investment plans. However, it is not recommended to avail a life insurance policy with the sole motive of saving income tax as these policies primarily aim to provide life coverage. Along with the life cover, one can claim income tax benefit up to Rs. 1.5 lakh under Section 80C and 10(10D) of the Income Tax Act, 1961.
Even though most taxpayers delay income tax planning until the last quarter of the financial year, they ultimately end up making hasty decisions. The best time to plan your tax-saving investments is the beginning of the fiscal year. This will give you dual benefit: Time to evaluate and choose the most suitable tax-saving investment plan and help you to fulfil your short-term as well as long-term financial goals. Happy investing!
