Section 80C of the Income Tax Act, 1961 provides a tax exemption of up to Rs. 1,50,000 on various investment products. You must choose your Tax Saving investment plans in such a way that they reduce your taxable income while also giving you maximum returns. Safety and liquidity are other factors that must be considered when selecting an investment plan.
Let’s discuss some of the best Tax Saving investment plans here. They vary in terms of returns, periods, and other features, but they all do a good job of reducing your taxable income and providing some great returns which in turn help build up your life’s savings. One rule of thumb to remember, however, would be the fact that although all your investments are mostly exempted from taxes, your returns in most cases would be taxable.
Equity-Linked Savings Scheme (ELSS)
The equity-linked Savings Scheme invests 80% of its portfolio in equity and equity-related instruments. ELSS is a highly suitable Tax Saving investment scheme because it is covered under 80C of the Income Tax Act with a tax exemption limit of Rs. 1,50,000. The lock-in period of this scheme begins at 3 years. The interest rate provided by ELSS ranges between 15% and 18%, even though the interest rate varies as per the equity market performance.
Tax exemption is available for both lump sum investment as well as systemic investments (SIPs) in ELSS. Investors can choose between dividend and growth options. The growth option is more suitable since 10% of your dividends in equity schemes will be taxable – this has been in effect since 1st April 2018.
Altogether, ELSS is one of the most popular Tax Saving investment plans because of long-term capital appreciation and tax savings.
Unit Linked Insurance Plan (ULIP)
Unit LinkedIn Insurance Plan is a good Tax Saving investment plan because it combines tax benefits with insurance cover and returns. ULIP invests a part of the premium in an investment fund. The investor has a range of investment options, such as stocks, mutual funds, bonds, etc. The remaining part of the premium amount is used to provide insurance cover. The lock-in period is a minimum of 5 years. The investors also have the freedom to switch between funds 3-4 times a year.
ULIP is a Tax Saving investment plan because its premium is eligible for tax deductions under 80C of the Income Tax Act, 1961. In addition, the income received on the maturation of the policy is also tax exempted as per the provisions of Section 10(10D). Thus, ULIP provides double tax benefits on both the premium and the returns.
National Pension Scheme
The National Pension Scheme is a popular Tax Saving investment scheme for both government and private employees. Under this scheme, a voluntary contribution is made to the fund at regular intervals throughout his/her term of employment. The invested amount is distributed across schemes, including equity markets. The investor is free to withdraw a part of the corpus on retirement while the remaining corpus provides a steady income in the retirement years. The interest rate varies between 8%-10%, and the lock-in period is till retirement.
NPS is a Tax Saving investment plan because the investor can claim income tax deductions up to a limit of Rs. 1.5 lakhs for contributing to NPS under 80CCD(1), part of Section 80C. A sub-section 80CCD(1B) has been added, which provides additional tax deductions up to Rs. 50,000. The depositor can withdraw a maximum of 60% of the corpus fund on retirement. 80% of this amount withdrawn is exempted from taxes, while the rest 60% is taxable.
Public Provident Fund
Public Provident Fund or PPF is a long-term Tax Saving investment scheme by the Government of India. PPF has the EEE or exempt-exempt-exempt status. This means that not only the contributions made towards a PPF account enjoy tax deductions up to Rs. 1.5 lakhs in a financial year, but the maturity amount and the interest earned are also tax-exempted. Thus, PPF is considered to be one of the best Tax Saving investment products in India.
PPF has a lock-in period of 15 years with the option of extension for 5 more years. The interest rate is 7%-8%. Partial withdrawals are allowed only after completing 7 financial years from the date of opening the PPF account. Only 1 withdrawal is allowed in a financial year, and the withdrawal amount cannot exceed 50% of the balance amount.
National Savings Certificate
National Savings Certificate is a low-risk Tax Saving investment designed especially for small and mid-level investors. Investments made to NSC are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. The interest earned on NSC in a financial year is added to the initial investment, and it also becomes eligible for tax deductions. Hence, the investor gets a dual benefit.
The annual interest rate provided by NSC is 6.8%. On maturity, the amount received by the investor is subject to taxation.
Health Insurance is a cushion against financial losses caused by expensive medical treatments and acts as a Tax Saving investment. Section 80D of the Income Tax Act provides tax exemptions on the premiums paid for health insurance policies purchased for self, spouse, children, and parents.
The exemption limit is Rs. 25,000 for the premium paid for self, spouse, and children – with all being under 60 years. The limit rises to Rs. 50,000 if the taxpayer or their spouse or both are aged above 60. Premiums paid on behalf of parents are eligible for deductions up to Rs. 25,000. This limit increases to Rs. 50,000 if the parents are senior citizens. Additional deduction up to Rs. 5,000 is also provided for preventive health check-ups.
It must be remembered that health insurance is a Tax Saving investment only as long as the premium is not paid by cash. Tax deductions are also not applicable for premiums paid on behalf of non-dependent children or siblings.
Sukanya Samridhi Yojana
Sukanya Samridhi Yojana is a Tax Saving investment scheme for parents of girls. Under this scheme, a minimum amount of Rs. 250 needs to be deposited each year. The depositor earns interest on the deposit at a rate determined by the GOI each quarter. The lock-in period is 21 years. The maturity amount is paid to the female beneficiary. This is a Tax Saving investment because the taxpayer parent of the girl child is eligible for income tax deduction under Section 80C on the deposit made to the scheme.