There are several tax-saving investments under the income tax act which, when used smartly, can help one reduce one’s tax outgo
It is essential to make regular investments to make our money grow, especially for future personal financial goals like saving for children’s education, retirement, and so on. Indian Income Tax Act of 1961 has several tax saving options to motivate investors and reduce tax liability. How it works is, the investment amount gets deducted from your total taxable income.
Now, we will look at some of the best income tax saving investments and how they help one save taxes.
Most of the vital options fall under section 80C (of the Income Tax Act) and its subsections. The deductions available for all these investment options are capped at Rs 1.5 lakh. Let us take a look at them in detail.
- Public Provident Fund (PPF): PPF is considered one of the best tax-saving investments under section 80C for those who are looking at minimum risk. PPF investments have a lock-in period of 15 years after which you can extend every five years. The rate of interest is determined ministry of finance from time to time; the current rate is 7.9 per cent per annum. One of the most attractive feature of PPF is that it provides tax benefits at all levels. It falls under the exempt, exempt, exempt (EEE) category. This means that not only are your PPF contributions deductible under section 80C; further, the accumulated amount and interest are also tax-free on withdrawal. With a relatively long investment horizon and its tax benefits, PPF is appropriate for long term investment.
- Equity Linked Savings Scheme (ELSS): This refers to diversified equity mutual funds that offer tax benefits under section 80C. An ELSS invests primarily in the stock markets. It has a lock-in period of three years. Moreover, if you choose the SIP option, each SIP installment has a different maturity date. The benefit of an ELSS is that since the returns are linked to the market, it has the potential to offer comparatively higher returns. Hence it is considered one of the most profitable tax saving investment options.
- Unit Linked Insurance Plans (ULIPs): Investments in ULIP are eligible for deduction under section 80C. ULIPs provide both life cover and market-linked returns. ULIPs have a lock-in period of five years. A part of your premiums is used to provide you with a life cover, and the other part is invested in funds of your choice. You can choose from a wide range to invest. The return on investments is market-linked. They depend on the performance of the funds. The investment returns are also exempt from tax under section 10 (10D) of the income tax act.
- Sukanya Samriddhi Yojana: As the name suggests, this scheme is for young girls. Currently, the rate of interest is 8.4 percent per annum, compounded monthly and paid annually; it matures when a girl turns 21 years. The contributions under this scheme and the interest earned are both tax-free. So if you’re looking to secure your daughter’s future and an income tax saving option, this is the ideal investment choice.
- National Savings Certificate (NSC): It is a fixed income investment and one of the best tax saving options for small investors. Like PPF, this is also a low-risk product and offers guaranteed returns. NSC comes with two maturity periods, five years and ten years. There is no upper investment limit, but like other 80C investments, the maximum deduction available is capped at Rs 1.5 lakh. The rate of interest is 7.9 percent and compounded annually.
- 5- year tax-saving fixed deposits: Some 5-year fixed deposits provide benefits under section 80C of the income tax act. These are also called tax-saving fixed deposits — the prevailing interest rate ranges from 6-7.5 percent.
- National Pension Scheme (NPS): This is a pension scheme run by the government of India. The idea is to provide citizens with a regular income in retirement. You can open two types of accounts, Tier 1 (mandatory), Tier 2 (voluntary. There are several tax benefits, especially for Tier 1 account holders. Let us take a look.
- As an NPS subscriber, you can claim a deduction of up to 10 percent of your gross income under section 80CCD(1) of the income tax act. However, this deduction has a ceiling of Rs 1.5 lakh. Further, an additional deduction for investment of up to Rs 50,000 is available under section 80CCD(1B). This deduction is beyond Rs 1.5 lakh available under section 80CCD(1). So the total tax deduction you can claim for NPS is a maximum of Rs 2 lakh, subject to certain conditions.
- The additional tax benefit is also available to subscribers under the corporate sector under section 80CCD(2). The contribution of the employer up to 10 percent of salary (Basic+DA) is eligible for deduction from taxable income. This deduction does not have any monetary limit.
- All the benefits mentioned above apply to Tier 1 accounts. Contributions to the NPS Tier 2 account are also eligible for tax deduction under section 80C up to Rs 1.5 lakh per annum. However, you would need to hold and contribute to this account for at least three years to avail tax benefits.
- Senior Citizen Saving Scheme: This scheme is specially designed for senior citizens. The maximum amount you can invest is Rs 15 lakh (in case of joint holding) and Rs 9 lakh (in case of single holding). This scheme has a lock-in period of five years. It can be extended by an additional three years. The interest is payable every quarter and is currently fixed at 8.6 percent. The interest earned on the Senior Citizen Savings Scheme is fully taxable. In case the interest amount is more than Rs 50,000, there is tax deducted at source applicable.
- Life insurance premiums: Premiums towards life insurance policies are also exempt under section 80C. However, returns on money-back insurance plans are not a good investment option as they deliver returns in the range of 5-6 per cent. Premiums paid towards pure term insurance plans that do not offer any returns are also eligible for a tax deduction.
You should remember that all the investments above have a combined exemption limit of Rs 1.5 lakh. Investments can be made over the limit, but they will not be eligible for tax benefits. An investor should add up each of his 80C investments and see how he/she can maximise the tax benefits. Keeping in mind these tax saving investment options can help one save on taxes while investing for future goals.