Investments to Enhance Tax Saving in The New Financial Year

The new financial year has begun and all taxpayers, both salaried and non-salaried, need to plan their investments in order to enhance their tax saving options. Every investor is always on the look-out for new investment options that help them to save tax and generate tax-free income. The scouting for the new investment options must be done in a manner that they offer you with options to generate tax-free income. While investments in tax-saving instruments like National Savings Certificate or a 5-year tax-saving fixed deposit can help save tax for the current year, however, in the long run, the interest accrued by investing in such investments are taxed. The interest amount is added to your income. So, it is important to scout for investment instruments that help you enhance your tax savings, and also generate tax-free income.

List of top 6 Investment Avenues to enhance tax saving in 2019-20

Here is a complete guide of such tax-saving investment instruments that will help you enhance tax savings in the new financial year.

• Unit Linked Insurance Plans or ULIPs: Insurance plan is one of the most attractive investment options that offers dual benefit. This investment product offers risk-cover as well as favourable returns on the money invested. The money in ULIPs is invested under various market-linked products thereby reducing the risk exposure. Similarly, the investment is done for a longer duration of around 15 years to 20 years. For the initial 5 years, the money is in ‘Lock-in’ period where the investor cannot withdraw the money. ULIPs have a good potential to perform but as the investments are linked to capital market, so they are not guaranteed. Proceeds received at the end of the tenure or after 5 years are tax-free. Investors who have a risk appetite should consider investing in ULIPs.

• Equity Linked Savings Schemes or ELSS: This is a diversified investment in equity instruments which qualify for tax deduction under Section 80C of the Income Tax Act. Even though investing in this instrument attracts 10% LTCG, still investing in this instrument is preferable for their long-term consistent performance. Investors can also mitigate the risk by diversifying their investment across different ELSS schemes.

• Public Provident Fund or PPF: Public provident fund has been for decades one of the most attractive investment tools that offer attractive returns on investment. Since its inception, it has been one of the most popular tax saving instruments of investors. The main reason for its popularity is that the instrument guarantees returns and that too tax-free. Currently, the PPF account offers 7.9% returns per annum (the interest rates revise every quarter). Apart from offering tax-free returns, another advantage of investing in PPF account is that the investment can be extended, beyond the initial 15 years, numerous times in blocks of 5 years. Thus, investing in this instrument is advantageous as the returns are tax-free, the rate of interest offered is at par with other investment instruments, investment can be started with a minimum of Rs. 500 and the entire investment is risk free since there is no exposure to capital market.

• Employees’ Provident Fund (EPF): Employee provident fund is another means of generating tax-free returns on the investments. This option is available to the salaried individuals who seek to invest for a longer duration. Investing in EPF helps individuals to create a tax-free corpus. Employees contribute 12% of their basic salary every month to EPF account. Similarly, the employer is also required to contribute the same amount towards employees EPF account. Only the employees’ contribution or payment towards his own EPF is eligible for tax exemption U/S 80C of the Income Tax Act. The interest is accrued on the contribution made by both i.e. employee and employer.

  The entire interest accrued over the years is entirely tax-free in the hands of the employee. Similarly, if an employee wishes to increase the contribution, it can be done. The employee can increase the contribution up to 100% of basic salary and Dearness Allowance This additional contribution is to be made in ‘Voluntary Provident Fund’ account which is a sub-set of EPF. All the terms and condition remain same for VPF. The interest that is earned on the EPF account and VPF account is exempted from the ambit of tax as long as the employee remains in the employment for continuous 5 years or more.

• Other Insurance Products: Apart from Unit Linked Insurance plans other insurance products are also a good means for enhancing tax saving in the new financial year. Traditional insurance plans like the endowment plan, money back plans, term insurance or whole life plans are other investment options that enhance your tax saving measures. Premium paid towards purchase or continuance of insurance plans are eligible for tax benefit U/S 80C of the Income Tax Act. Similarly, the maturity benefit and/or the death benefit is also tax-free in the hands of the receiver under section 10(10D).

• Sukanya Samriddhi Yojana: Sukanya Samriddhi Yojana is a new initiative by the government of India, intended at strengthening the girl child financially. This scheme is introduced for the girl child, and only parents of the girl child are eligible to invest under this scheme. The tax benefit eligible under the scheme is extended to parents. Under this initiative parents can open a Sukanya Samriddhi account in the name of their girl child. Every parent can open maximum 2 Sukanya Samriddhi Yojana account for 2 girl children. This account needs to be opened in the name of girl child any time after her birth till she reaches the age of 10. The account can be opened with a sum of Rs. 1000, while the maximum amount that can be deposited in a year is Rs 1.5 Lakhs. The Sukanya Samriddhi account is active and operative for 21 years i.e. the account matures after 21 years from the date of opening. Currently, the Sukanya Samriddhi Yojana account garners interest rate of 8.4% per annum. All the investment and maturity returns earned are completely exempted from tax ambit.

At the end, we can summarize that all investors must review each product and then invest in them as per their financial goals. All the above investment tools will help investors to enhance their tax savings in the new financial year.