Income tax is one thing that everyone wants to reduce as maximum as possible. Tax saving investments play a vital role in fulfilling this purpose. One side these investment helps in tax deduction and on the other side become a future income source.
Tax Saving Tips
You can get tax deduction up to Rs 2,25,000 in one financial year by investing in the following income tax saving options
- Deduction up to Rs 1,50,000 under section 80C
- Under the new pension scheme deduction up to Rs 50,000
- Deduction up to Rs 25,000 under RGESS ( only for the first time).
Here are the 11 Best Tax Saving Investments In India
Tax Saving Investments Under 80C
#1. ELSS Tax Saving Mutual Funds
Equity Linked Saving Scheme belongs to equity mutual fund class. ELSS is basically a diversified equity mutual fund which gives you the benefit of tax deduction under section 80C of the income tax act. It is also known as ‘tax saving mutual funds’.
Indians do not explore this investment option. It is the best investment to get exposure to equity as well as save some tax under 80C.
Even the Indian Government encourage ELSS investments to bring the common man into equity.
- The return is not fixed or guaranteed, but wisely investment may offer higher return as compared to other tax saving investment options.
- Least lock-in-period of 3 years as compared to another tax investment plans.
- Investment up to INR 1,50,000/- per annum qualifies for tax rebate under section 80C of Income Tax Act.
- Minimum investment limit is Rs 500.
- There is no maximum limit on investment
- Dividends and capital gains are also tax-free in the case of ELSS.
Systematic investment plan (SIP) (best tax saving options for salaried Person) is the best way of investing in mutual funds in which a fixed sum is invested at regular intervals in the mutual funds. The minimum amount of SIP is Rs 500 per month
#2. Public Provident Fund
PPF is traditional and most preferable tax saving investment. It is issued by the central bank which makes this totally secure investment.
PPF is a long-term tax saving investment option having a lock-in period of 15 years. Long tenure also makes PPF a retirement investment option.
Almost all major banks offer the facility to open a PPF account. This makes easy to handle your PPF account along with your bank account.
Key Points of PPF
- PPF contribution qualifies for rebate under section 80c of income tax act.
- The present interest rate on PPF is 7.8%, higher than fixed deposit interest rate.
- The lock-in period of PPF is 15 years. This can be extended for 5 years at every renewal.
- Minimum investment limit is Rs 500 and maximum investment limit is Rs 1,50,000. Excess of Rs 1,50,000 limit, you will get no rebate and interest.
- The maturity amount and interest amount is tax-free.
- Withdrawal from PPF account permitted from 6th year.
- You can take a loan on PPF account from the 3rd year up to the 5th financial year. The loan rate shall be 2% higher than the PPF interest rate.
- NRIs are not eligible for PPF investment.
I sum all the information that you should know about PPF, here it is PPF Investment ( Everything you should know)
#3. Voluntary Provident Fund (Tax saving options for salaried 2017-18)
The voluntary provident fund is an additional contribution from the employee to his provident fund. This contribution is beyond the employee EPF contribution.
The VPF amount is credited to the EPF account and there is no separate VPF account. The amount is eligible for tax deduction under 80C of the income tax act.
- Only the salaried persons can make an investment in the VPF.
- Maximum of 100% of the basic and DA is allowed to contribute.
- The interest rate is the same of EPF. The current rate is 8.65%.
- Maturity returns are tax-free.
- The tax benefit is subject to a minimum lock-in period of 5 years which means an employee has to make continues contribution for minimum 5 years.
#4. Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana is an investment scheme introduced by the Indian government only for the girl child. The account can be opened by parents or legal guardian with any post office or public sector bank on the name of the girl child.
The account can be opened from the birth of the girl until the age of 10 years. Maximum two accounts can be opened with the name of two different girl children.
- The present interest rate is 8.4% per annum, compounded yearly.
- Tenure of SSA is 21 years from the date of account opening.
- The normal Premature closure will be allowed after completion of 18 years provided that girl is married.
- Minimum yearly investment is Rs. 1000.
- Money deposited in SSA will be eligible for tax deduction under 80C up to the limit of Rs 1,50,000 per annum.
- You can practically withdraw from the account up to 50% only in case of financial urgency. The child must attain the age of 18 years for such withdrawal.
- On the marriage, the account will automatically close. Whether it happens before the 21 years of account opening.
If you have a girl child, You must have SSY in your investment portfolio. The interest rate is highest as compared to other tax saving investment plans. The SSY investment will create a fund which can be used at the time of higher studies or marriage.
#5. Senior Citizen Saving Scheme
As the name suggests, senior citizen saving scheme is purely for the senior citizens. This is the one of the best tax saving investment for the senior citizens as it provides a regular return in form of interest which take care the financial needs. The investor is also allowed to withdraw prematurely subject to some terms and conditions.
SCSS is also the safe investment plan because the funds are backed up the Indian government.
- Investment under SCSS is qualified for the benefit of Section 80C of the Income Tax Act.
- An individual must have an age of 60 years or more.
- An individual of the age of 55 years or more but less than 60 years who have retired on superannuation or under VRS can also open an account, subject to the condition that, the account is opened within one month of receipt of retirement benefits and the amount should not exceed the amount of retirement benefits.
- Maturity period is 5 years.
- The present interest rate is 8.4% and can be drawn through auto credit into the saving account.
- Interest is calculated compounded quarterly.
- There shall be only one deposit in the account in multiple of Rs 1000/- maximum amount should not exceed Rs 15 lakh.
- Premature closure is allowed after one year on deduction of an amount equal to 1.5% of the deposit & after 2 years 1% of the deposit.
- Interest earned is fully taxable.
#6. National Saving Certificate
The National saving certificate is issued by the post offices. This scheme is specially designed for government employees, businessmen, and other salaried classes income tax assessee.
The principal amount and interest are backed up by the central government. Hence purely a secure tax saving investment plan.
Early post office offered two different NSC options. NSC VIII having a tenure of 5 years and NSC IX having tenure 10 years. But in Dec 2015, the ministry of finance discontinued NSC IX.
- The Tenure of NSC VIII is 5 year.
- An interest rate is 7.9%.
- Minimum investment limit is Rs 100.
- Investment up to INR 1,00,000/- per annum qualifies for tax rebate under section 80C of Income Tax Act.
- Interest earned on NSC is taxable but can be exempted under sec 80C ( up to Rs 1,50,000) in the following years.
- Saving certificates can be kept as collateral security to get a loan from banks.
#7. Tax Saving Bank Fixed Deposit
You would already know about the tax saving Bank fixed deposit. Every bank offers tax saving fixed deposit and you can make an investment through net banking also.
- The lock-in period is 5 years, greater than ELSS.
- Interest rate varies between 6% to 7.50%.
- Interest is calculated compounded quarterly.
- Minimum deposit limit is Rs 100.
- Maximum deposit limit is Rs 1,50,000 in one financial year.
- The deposit cannot be withdrawn prematurely.
- Interest earned is considered as income from other sources, so interest is fully taxable.
- You can select a cumulative or non-cumulative way of crediting periodical interest.
Taxable interest makes bank fixed deposit less effective as compared to other investment plans in which returns are also tax-free.
#8. Tax Saving Postal Fixed Deposit
Postal Fixed deposit has the same features of the bank fixed deposit. You can make tax saving fixed deposit at any post office across the India.
- The lock-in period is 5 years.
- The interest rate is 7.7%.
- Interest is calculated compounded quarterly.
- Minimum deposit limit is Rs 200 and in multiples of Rs 200.
- There is no maximum investment limit but maximum Rs 1,50,000 is allowed for tax saving 80C.
- The deposit cannot be withdrawn prematurely.
At present, post office offers a higher interest rate on tax saving fixed deposit as compared to the banks. For fixed deposit, post office FD is better.
#9. Life Insurance Plan
Life insurance is not purely an investment plan yet consider as one of the tax saving investment option. Insurance plans fulfill the dual purpose. One side provides the life cover which helps for the unforeseen events in life and on the other side premium paid towards the life insurance policy is eligible for deduction under section 80C.
- Premium paid toward the life insurance policy eligible for tax deduction under 80C up to the limit of Rs 1,50,000 per annum.
- The amount received on maturity or on death is tax-free.
- Provides return from 4% – 5.50% depends on the policy.
Disclaimer, I don’t consider the life insurance policy as a good investment option because of least return.Rather than, I refer you to buy a term insurance policy rather than endowment policy. Term plans cost low and provide high-risk coverage. And get a benefit of the 80C limit by making an investment in other higher return investment options.
Tax Saving Options Other Than 80C
#10. New Pension Scheme
New Pension Scheme is an additional tax saving investment option above the 80C limit. Your contribution to the new pension scheme is deducted from income tax up to a limit of Rs 50,000.
In NPS, funds are invested in major three categories of equity, debt fund, and government securities. A balanced mix of all the three funds would generate good returns for the investors.
New Pension Scheme is available in two approaches, Tier-1 and Tier- 2.
Tier 1 account – Under this account, subscribers cannot withdraw funds before the retirement. It is compulsory for all government employees to invest or direct 10% of their salary into this account.
Tier 2 account – Under this account, subscribers are free to invest funds as well as withdraw funds as per their convenience. However, a subscriber must possess a Tier I account in order to open a Tier II account.
New pension scheme deduction allowed under sec 80CCD(2).
#11. Rajiv Gandhi Equity Saving Scheme
Rajiv Gandhi Equity Saving Scheme is a tax saving scheme announced in 2012-13 to motivate small investors to invest their savings in the domestic capital markets. The investment in RGESS is allowed for deduction under Sec 80CCG.
RGESS Investment Conditions
- Tax deductions under Section 80CCG of the Income Tax Act are can be availed only by first-time investors in the equity market and only one time.
- The investor’s gross total income for the relevant assessment year should not exceed Rs. 12 lacs.
- The investment should be made in stocks listed on BSE 100 or CNX 100. Mutual funds also qualify for deduction under this section.
Key Points of RGESS
- The maximum investment under this scheme is limited to Rs 50,000, with a deduction of 50% available to investors. For example, you invested Rs 50,000 first time in an equity scheme. Now, you are eligible for tax deduction of 50% your investment which is Rs 25000.
- The return is not fixed or guaranteed as the investment is made in equity and mutual funds.
- The lock-in period is 3 years. The first year is fixed lock-in and the second & third year is flexible lock-in period.
As the only first-time investor is eligible for deduction under 80CCG as this investment become less effective.
Comparison Between Tax Saving Investments
|S.no||Tax Saving Investment||Section||Return||Tax On Return||Best for|
|1.||ELSS||80C||Not Fixed||Tax-Free investment||Every individual|
|2.||Public Provident Fund||80C||7.8%||Tax-Free investment||Every individual|
|3.||Voluntary Provident Fund||80C||8.65%||Tax-Free investment||Salaried|
|4.||New Pension Scheme||80CCD(2)||Not Fixed||Taxable||Everyone|
|5.||Sukanya Samriddhi Yojana||80C||8.4%||Tax-Free investment||Having girl child|
|6.||Senior Citizen Saving Scheme||80C||8.4%||Taxable||Senior Citizen|
|7.||National Saving Certificate||80 C||7.9%||Taxable||Everyone|
|8.||Post Office Fixed Deposit||80C||7.7%||Taxble||Everyone|
|9.||Rajiv Gandhi Equity Saving Scheme||80CCG||Not Fixed||Tax-Free investment||First time equity investor|
|10.||Bank Fixed Deposit||80C||6-7.50%||Taxable||Everyone|
|11.||Life Insurance policy||80C||4% – 5.50%||Tax Free investment||Not Recommended|
Where Should You Invest For Tax Saving?
This is the most confusing question which may come in every tax saver’s mind. But the answer is not same for all.
Every person has different risk-taking capability, financial needs and belongs to different age section. So, a single investment option would not work for everyone.
There is some suggestion from me that would help you to choose tax saving investments
- If you have a girl child then you should invest some amount ( as per your requirement) in Sukanya Samriddhi Yojana. The interest rate is higher for SSY. This will create a corpus that you can use for your daughter’s higher study or marriage.
- If you are a youngster or recently start working then you should invest in ELSS because this is the best time to explore the mutual funds.
- If you are a salaried person, then you can go for Voluntary Provident Fund because VPF offers the highest rate of return.
- Make an investment in New Pension Scheme for getting additional deduction over and above 80C.
- You must invest in PPF (whatever amount) for your long terms goals or even for your retirement.
- A senior citizen can go for Senior Citizen Saving Scheme for getting higher interest rate.
My Final Advice
Most of the people make investments in February and March for tax saving. This is totally wrong. You will get return only for 1-2 months. But, If you have a clear vision about your future goals, investment and income then you must start investing from the beginning of the year. In this way, you will get return up to 12 months.