Tax saving investments are crucial to one’s financial planning, because they not only help an investor to save tax but also meet different financial goals. The Income Tax 1961 offers several tax savings investments for the investor so that he saves on taxes and at the same time make investments for the future. These tax saving investments are also referred to as tax free investments because the amount invested in these can be claimed as a deduction, this reducing total tax liability of an investor.
We look at some of the best tax saving investments, their features and how they will help you save taxes. All the investments mentioned below allow you an exemption of up to Rs 1.5 lakh u/s 80 C and are the best tax savings investments in India. National Pension Scheme or NPS that comes with an additional tax benefit of Rs 50,000 is also a tax-free investment that is gaining popularity after it was opened for all citizens in 2009.
1. ELSS: Also known as Equity Linked Savings Scheme, it is one of the most popular of tax savings investments. These are funds which invest in diversified equity funds and have a lock-in period of 3 years. Returns from ELSS funds over Rs 1 lakh per year is subject to long term capital gains at 10 per cent. ELSS comes with market risks, but it has the potential to generate higher returns than all the other tax saving investments. In the last 5 years ELSS as a category has given average returns of 15.52 per annum. For investors with a high-risk appetite and looking for long term wealth creation, ELSS is among the best tax savings investments.
2. PPF: Also known as public provident fund it is tax saving scheme offered by the Government. PPF is one of the most popular long-term tax saving investments because it has a EEE (Exempt, Exempt, Exempt) regime of taxation. Apart from the exemption u/s 80C, the interest earned, and the maturity proceeds are also exempt from tax. So, it is the most ideal among tax free instruments. PPF has a minimum tenure of 15 years post which it can be extended by a block of 5 years if the investor wishes. The interest rate on PPF is subject to change every quarter, Currently the PPF rate (from January to March 2019) stands at 8 per cent compounded annually. Being a long-term product it one of the tax saving investment options one can use for retirement.
3. Bank FD: Fixed deposits with bank with a lock-in period of 5 years is also one of the tax saving investments available. Tax Saver Fixed Deposits have a lock-in period of 5 years. Investors can however stay invested till 10 years. The interest earned on tax saving FD gets added to the annual income of the taxpayer and is taxed as per the income tax slabs he falls in. 5- year bank FDs bear less risk hence provide comparatively lower but guaranteed returns. Currently 5 years FDs are offering interest rates in a range of 6-7.25 per cent. Rates for senior citizens are 0.50 per cent higher. Tax saver FDs are one of the best tax saving investment options for those who have a low risk appetite, especially those nearing retirement or post retirement.
4. National Pension Scheme: The National Pension Scheme or NPS gives an additional savings of Rs 50,000 u/s 80 CCD (1b) for contribution to NPS, thus making it one among the most attractive tax saving investment options. Also, if the employer contributes 10 per cent of the basic salary of the individual in NPS, that amount is not taxable. The entire 60 per cent of the corpus that can be withdrawn at retirement is tax free. Though a lot depends on your asset allocation, the long term returns on NPS could be in the range of 8-10 per cent, making it one of the tax saving investment options.
5. ULIPs: Unit Linked Insurance Plans also known as ULIPs are sold by insurance companies is one of the best tax saving investment option in India. ULIPs give the benefit of investment coupled with insurance coverage. The premium paid towards a ULIP policy is allowed as a deduction u/s section 80C. ULIPs offer death benefit, so if the insured dies during the tenure of the policy, the nominee is paid the higher of sum assured or fund value. ULIPs offer investors the option to choose between equity and debt funds depending on their risk appetite and their goals. ULIPs have a lock-in period of 5 years.
6. NSC: Also known as National Savings Certificate, it is issued by the post office. As far as tax savings investments go this is one of the safest. NSCs are available for fixed maturity periods of 5 years and 10 years. There is no maximum limit of purchasing NSCs but investments up to Rs 1.5 lakh are eligible for deduction u/s 80C of Income Tax Act. The interest rate currently is 8 per cent per annum and is revised every quarter. NSC is suitable for the small investor and is meant for the investor who is looking for a safe tax-free investment option.
Knowing about tax free investments is key to smart tax planning and maximising the returns from your investment.