Taxes in India are classified into two broad categories. A compulsory contribution levied on the income as per fixed slabs is known as a direct tax. The second classification is the fee charged on goods, services, and transactions, also known as indirect tax.
While indirect taxes do not pinch the consumer directly, direct taxes are often cumbersome. But, with appropriate investments and options, direct taxes can be saved largely, as permissible under the Income Tax Act 1961.
What are Tax-Saving Investments?
Tax-saving investments are an integral part of a financial plan. These not only help to save money but also help the money grow through directed returns. However, as a wise investor, the goal should not be how to save tax or merely secure tax-saving investments. Instead, the objective should be to consider options based on returns, risk, liquidity, maturity, etc. Investments should provide tax exemptions and also allow tax-free earnings.
Some of the best tax-saving investment options for Indian taxpayers
Insurance
Life insurance is considered a good investment option not only because of coverage against uncertain events but also due to the tax-saving options in insurance. There are multiple insurance policies available in the market, which can be broadly classified into two groups – permanent and term insurance.
Each category has its advantages and disadvantages, but overall both types are tax-saving insurance with comprehensive protection. This is one of the best tax-saving investments for people who want minimum risk and stabilized returns.
Term plan
A term plan is the purest form of protection, where the insurer provides financial protection to the family in case of the demise of the insured within the specified period. It is a very affordable type of insurance that provides comprehensive coverage. It is one of the most coveted plans in India.
A term plan allows the insured to not only get a death assurance but also protection against uncertainties such as accidents, permanent disability, critical illness, etc. An insurer offers different riders, which can be added to the plan to enhance the coverage.
Additionally, this policy allows the insurer to increase coverage with different life milestones. There are also flexible payout options, including immediate, recurring, increasing recurring, etc., to suit the insured’s needs.
As per the Income Tax Act of 1961, the premium of a term insurance plan is exempted from tax up to ₹1.5 lakh under Section 80 C. Also, as per Section 10 (10D), the death benefit is exempted under the Term Return of Premium Plan (TROP).
Permanent Insurance
As per the Income Tax Act, there is no taxability of life insurance maturity amount or the death benefit paid. Moreover, the cash value of the policy is allowed to grow tax-deferred. The dividends received are not taxable unless they are greater than the premiums paid on the policy. Also, the insured can borrow against the cash value of tax-saving life insurance policies.
Equity-Linked Savings Scheme (ELSS)
ELSS is an immensely popular tax-saving scheme in India. This is a close-ended diversified equity plan, which has a lock-in period of 3 years. These investments allocate a major corpus into equity or equity-related funds and, thus, have the potential to provide high returns. However, these are also very risky investments since the changes in the market majorly impact them. That said, on average, these funds provide 15%-18% of returns.
Additionally, investing across different ELSS schemes can help distribute risk and increase the chance of higher returns. Such types of tax-saving options are suitable for people who have a high-risk appetite and desire high rewards within a short period. These funds are also the best tax-saving investments for people who desire more liquidity, flexibility, and ease of management. ELSS investments can be easily managed online and are more transparent and stress-free.
As per the Income Tax Act, ELSS investments are subject to tax exemption up to ₹1.5 lakh under Section 80C of the Act. However, as per the amendments to the law, the dividends from such tax-saving schemes are taxable at the rate of 10%.
National Pension Scheme (NPS)
NPS is a government-backed pension plan that was launched in 2004 for all types and categories of Government employees in India. It was later opened to the general public in 2009. This tax-saving scheme allows people to voluntarily deposit a certain sum regularly to a pension account throughout their working years of life.
This contribution fund is linked to the market and is managed by professional fund managers. This is a perfect source of retirement income with reasonable market-based returns, transparency, and government support. However, these tax-saving schemes are generally focused on retirement but can be entered into by any age group. The minimum and maximum lock-in period in NPS is 10 years and retirement, respectively. This increases the benefit from compounding, thus, increasing the maturity corpus.
This plan offers the flexibility to choose the investment option, annuity, service provider, fund manager, etc. However, the subscriber is in final control of the funds and can actively manage them to increase rewards and reduce risk. The cost of the NPS is very low. A person can invest in the scheme with a minimum of ₹1000 per year. The management of NPS is transparent and easy through online channels. As per the Income Tax Act, NPS provides three tax advantages:
Individual contributors can claim tax exemption up to ₹1.5 lakh under Section 80CCE. According to Section 80CCD (1B), an additional deduction of up to ₹50,000 is allowed. As per Section 80CCD (2), corporate contributions made by the employer, up to 10% of the basic salary of the employee, are tax exempted.
But in NPS, it is compulsory to invest 40% in an annuity plan to gain monthly income. Moreover, the annuity received at retirement is treated as fully taxable under income from other sources. Only 40% of the sum is exempted from tax at maturity. Also, withdrawals from the scheme are not permitted unless under special circumstances.
Unit Linked Insurance Plan (ULIP)
This plan is popular as a tax-saving investment option because it offers insurance coverage and investment together in a single plan. Insurance providers generally offer this multi-faceted product to people that think beyond basic tax exemption. Their aim is also to build wealth through high returns on long-term investments.
In a ULIP, the policyholder pays regular premiums, a part of which is used to provide insurance coverage. The other portion is invested in equity, bonds, or mutual funds. This allows for higher returns and a balanced portfolio. Combined with zero administration and premium allocation fees, the ULIPs are considered favourable tax-saving investments.
This type of investment is best suited for those that desire stability with balanced risk and rewards. Investors who wish to keep close track of their funds and have a planning horizon of medium to long term can consider ULIPs. ULIPs also provide different funds with risks ranging from 0 to 100%, which can be opted for by an investor at any stage of life.
As per the Income Tax Act, 1961, the money invested in ULIPs, is eligible for tax exemption up to ₹1.5 lakh under Section 80C as life insurance or 80CCC as a pension. However, ULIPs are subject to capital market risks, which the policyholder bears.
Public Provident Fund (PPF)
PPFs are an extremely popular tax-saving investment option, majorly because of their high and stable returns. This fund is ideal for people with a low-risk appetite who desire full transparency and official backing by the government. A PPF account can be started with a minimum investment of ₹500 and can hold up to ₹1.5 lakh per annum. The contribution can be made in a lump sum or through regularly-timed instalments (12/year).
A PPF account has a minimum lock-in period of 15 years, before which there is no allowance to withdraw funds completely. But partial deductions are permitted after completion of 7 years up to 50% of the balance. The investor can extend the lock-in period by another 5 years post-expiry of the previous term if desired. Moreover, this particular investment acts as a reliable asset and allows the investor to borrow against it. But the maximum loan period cannot exceed 36 months.
The interest payable on the PPF account is determined by the Government of India and is usually between 7-8%. However, it can change quarterly at the discretion of the government. This type of tax-saving scheme allows a person to create a cushion fund to be utilized post-retirement.
As per the Income Tax Act, PPF belongs to the EEE category. That implies that the money contributed, interest earned, and maturity amount received from this tax-saving investment are completely exempted from tax up to ₹1.5 lakh under Section 80C.
National Savings Certificate (NSC)
Another popular tax-saving option is the NSC, which can be obtained from any government post office. These are fixed-income investments that have low risk and offer multiple benefits. NSC provides guaranteed interest-earning (currently at 7.95% per annum) and full protection of the capital invested since they are a government-sponsored investment option. The interest is compounded annually and is reinvested to be payable at maturity.
The maturity lock-in period of NSC is 5 years, which can be entered into with a minimum investment of ₹100. The investor can nominate any family member to inherit the policy in his or her absence. The plan specifically aims to boost tax-saving investments in the mid and small-income groups.
While there is no maximum upper limit on the purchase of NSC, only investments up to ₹1.5 lakh are exempted from tax under Section 80C of the Income Tax Act. Moreover, the earned interest is added back to the investment by default and is exempted from tax.
This will also allow the investor to claim the previous year’s interest, along with the current year’s NSC contribution, in the second year of NSC investment. Upon maturity, the entire NSC value is given to the investor, and no TDS is charged on the payout. But the investor has to pay the amount when filing for advance tax or during ITR filings.
Senior Citizens Savings Scheme (SCSS)
Particularly designed for those aged 60 and above, the SCSS is a very viable tax-saving option. This is a government-sponsored savings plan that aims to provide a steady and safe income source for senior citizens post their retirement. SCSS provides substantial returns between 8-9% (currently 8.7% per annum). The interest rates are revised every quarter, but the rate declared during the investment tenure remains fixed throughout.
The risk involved is negligible due to the backing of the government, and thus, these funds have gained huge popularity as tax-saving instruments. Indian citizens above 60 years of age can apply for SCSS via post offices or banks (both public and private). The minimum contribution for SCSS is ₹1,000, while the maximum funds cannot exceed ₹15 lakhs or the retirement benefit amount, whichever is lower.
The basic maturity tenure for SCSS is 5 years, which can be further extended by 3 years. In the extended period, the interest rates of the particular quarter will be applicable. Further, the SCSS allows premature withdrawals after one year of account opening but levies a penalty of 1.5% if the account is closed before two years. If the scheme is closed after 2 years, the penalty is charged at 1%. However, in case of the demise of the individual, there is no penalty charged for an early withdrawal. That said, the SCSS contributors receive quarterly disbursals of the deposited amount.
As per the Income Tax Act, the contributions made to SCSS by the investor are eligible for tax exemption up to ₹1.5 lakh under Section 80C. Overall, this is a very beneficial plan because it offers secure and high returns, ease of investing, tax-saving, reasonable lock-in period, and premature withdrawals to the investor.
Tax-Saving Fixed Deposits (FDs)
An age-old trusted investment method, fixed deposits are another reliable tax-saving option. A tax-saving FD provides guaranteed returns between 5-7% and is offered by all private and public banks, except cooperative and rural banks. The minimum amount of an FD varies from bank to bank, but the minimum lock-in period is 5 years in all cases. No premature withdrawals are permitted. The FD can be held in a ‘Joint’ or ‘Single’ name, but the tax-saving in the former is only available to the first holder.
The interest earned on the FD is fully taxable under the Income Tax Act. But the investor can claim a tax exemption on the amount invested in an FD up to ₹1.5 lakh under Section 80C of the Act. This mode of investment is best for those that have a low-risk appetite and desire stable and transparent returns with an assurance of their sum.
Sukanya Samriddhi Yojana
Launched in 2015, the Sukanya Samriddhi Yojana is an initiative by the Government of India under the scheme Beti Bachao, Beti Padhao. This scheme allows the legal guardian of an Indian resident girl within 10 years of age to open a savings bank account in her name. The account can be opened with an affiliated bank or India Post, where the investments grow at a rate of 7-8% per annum.
The campaign’s objective is to promote girl childbirth and education by relieving the legal guardians of some financial burden. The funds from the account can be used for the education and marriage of the girl. As per Section 80C of the Income Tax Act, the amount invested, maturity proceeds, withdrawal amount and the interest accrued is exempted from tax up to ₹1.5 lakh.
Health Insurance
Health insurance is another great tax-saving investment. It is a financial shield covering medical emergencies, healthcare expenses, hospital costs, medical tests, etc. Moreover, several health insurances plan offer cashless hospitalization facilities.
As per the Income Tax Act, health insurance premiums up to ₹25,000 can be claimed as a deduction under Section 80D. This includes preventive healthcare check-up fees for the insured, spouse and children. An additional deduction of ₹50,000 is permitted for health policies brought for parents who are senior citizens. For parents below 60 years, the deduction is ₹25,000.
Also, if the insured and the parents are both above 60 years, an additional deduction of ₹50,000 is permitted. This implies a total tax benefit of ₹1 lakh on health insurance premiums.
Interest in Home Loans
Buying a house is not only future security, but it is also a wise investment for the present. The interest paid on home loans (from any financial institution) up to ₹2 lakh is exempted from tax under Section 24 of the Income Tax Act. Additionally, ₹50,000 can be filed for exemption under Section 80EE of the Act. This is over and above the deduction of Section 24, provided the taxpayer meets the conditions specified.
How Should You Organize Your Year’s Tax-Saving Investments?
For both salaried and non-salaried taxpayers, the tax-saving window opens on April 1. A prudent tax-saving investment option should strive to provide revenue that is both tax-exempt and tax-free.
It would be smarter to start investing in the first quarter of the fiscal year as opposed to delaying until the end of the fiscal year and using ad hoc tax-saving strategies. Taxpayers would have more time to organise their investments and achieve the highest returns as a result. When choosing the best tax-saving investment strategy, factors including the fund’s safety, liquidity, and magnitude of returns should be considered.
Most tax-saving investment tax saving schemes are covered by Section 80C of the Income Tax Act, which entitles the taxpayer to an exemption of up to ₹1,50,000. Investors have various options, including ELSS (Equity Linked Savings Scheme), Public Provident Fund, Life Insurance, National Savings Scheme, Fixed Deposits, and Bonds.
Investments that Save Taxes for Seniors and Retirees
Since you will not be receiving a monthly salary after retirement, you will need a constant stream of money to cover your usual bills. What choices do the elderly have, then?
- Seniors can choose annuity plans, which guarantee a constant flow of funds into their accounts and also provide tax-saving options. One such program is the government’s “Senior Citizens Saving Scheme,” which anybody over 60 can enrol in at a post office or a bank. SCSS has the benefit of early withdrawals in addition to tax advantages under Section 80C.
- Unit Linked Insurance Plans (ULIPs) are a great option for producing retirement funds due to the ability to withdraw tax-free earnings at maturity under Section 10D and an exemption of up to ₹1.5 lakh from premiums paid under Section 80C.
Conclusion
To finalize the tax-saving investments, an investor should first calculate the tax-saving expenses such as home loan repayments, life insurance premiums, tuition fees of children, etc. And then assess if the total amount is over or under the maximum tax-saving limit under the relevant sections of the Income Tax Act. The difference amount, if any, is the actual amount that needs to be invested in one of the above tax-saving options.
All tax-saving investment options have their pros and cons. The choice of the type of investment is dependent on an individual’s goal, risk appetite, liquidity, and age.
FAQs
1. How does Income Tax work in India?
Income tax is a portion of your income that you are required to give to the government on a regular basis. The government uses the funds raised through this direct taxation method to pay personnel of both the federal and state governments, as well as for infrastructure improvements.
2. How to save tax for salary?
According to Section 80C of the Income Tax Act, which contains a variety of investments and costs, you can claim deductions - up to the maximum of ₹1.5 lakh in a financial year; section 80C includes the most popular tax-saving choices available to individuals and HUFs in India.
3. How to save tax without investment?
Claiming the deduction for interest paid on student loans is a tax-saving idea without investment. The interest paid on student loans obtained from a financial institution may be deducted under Section 80E. You can deduct the amount from your gross income, lowering your taxable income.
4. How much investment is needed to save tax?
Most tax-saving investment schemes are covered by Section 80C of the Income Tax Act, which entitles the taxpayer to an exemption of up to ₹1,50,000.
5. What is the maximum deduction under section 80D
The maximum deduction allowed under Section 80D for individuals under the age of 60 is ₹25,000 The ₹25,000 maximum includes ₹5,000 for annual preventive health exams. The maximum deduction rises to ₹50,000 if the covered person is older than 60.
6. Who can claim HRA exemption?
Under this Section of 80GG, employees and self-employed professionals who do not receive the House Rent Allowance may claim the HRA tax deductions for their outlays for paying the mortgage.
