Tax Savings Investments and Options in India

Every individual grapples with the complex and overwhelming world of investments. Making the right financial decisions becomes an absolute necessity, especially when these decisions impact your tax liabilities. If you’ve ever found yourself scratching your head over which tax saving investment to choose, you’re not alone.

The good news is India offers a variety of tax saving options designed to help you not only save on taxes but also grow your wealth over time. Whether you’re a seasoned investor or just starting out, understanding these tax saving instruments can significantly impact your financial planning.

What are Tax Saving Investments?

The Indian government provides tax benefits under various sections of the Income Tax Act, 1961 to encourage individuals to save and invest their money. These investments allow you to reduce your taxable income, effectively lowering the tax you must pay. By strategically choosing the right mix of investments, you can secure your financial future and make the most of the tax benefits available to you.

But here’s the thing, not all tax saving investments are created equal. They vary in risk, return, lock-in period, and the tax benefits they offer. This means that the best option depends on your financial goals, risk appetite, and the time horizon for your investments.

So, read ahead to understand some of the most popular tax saving investment schemes in India, and take a step towards making an informed choice.

Best Tax Saving Investment Options for Indian Taxpayers

Saving on taxes is a top priority for many Indian taxpayers, and fortunately, the Indian tax system offers a variety of avenues to do just that. From traditional tax saving schemes to modern tax saving options, there’s a wealth of choices to explore.

Insurance

Life insurance is considered a good investment option not only because it provides coverage against uncertain events but also because it offers tax-saving options. Multiple insurance policies are 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 insured’s demise 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 get a death assurance and 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. Flexible payout options, including immediate, recurring, increasing recurring, etc., are also available 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, the maturity amount or death benefit paid on life insurance policies is not taxable. Moreover, the policy’s cash value is allowed to grow tax-deferred. 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 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 tax saving schemes can help distribute risk and increase the chance of higher returns. Such tax saving options are suitable for people with a high-risk appetite who 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.

Under Section 80C of the Income Tax Act, ELSS investments are subject to tax exemption up to ₹1.5 lakh. However, as per the amendments to the law, 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.

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 in India are generally focused on retirement but can be entered into by any age group. NPS’s minimum and maximum lock-in periods are 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 controls 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 employee’s basic salary, are tax exempted.

However, in NPS, investing 40% in an annuity plan is compulsory to gain monthly income. Moreover, the annuity received at retirement is 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 multifaceted product to people who 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 favorable tax saving investments.

This type of investment is best suited for those who desire stability with balanced risk and rewards. Investors who wish to keep close track of their funds and have a medium- to long-term planning horizon 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, mainly because of their high and stable returns. This fund is ideal for people with a low-risk appetite who desire full transparency and official government backing. 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. However, partial deductions are permitted after completion of 7 years up to 50% of the balance. If desired, the investor can extend the lock-in period by another 5 years post-expiry of the previous term. Moreover, this investment is a reliable asset, allowing the investor to borrow against it. However, 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% and 8%. However, it can change quarterly at the government’s discretion. This tax saving scheme allows a person to create a cushion fund to be utilized post-retirement.

According to 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 exempt 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 are 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 it is a government-sponsored investment option. The interest is compounded annually and reinvested to be payable at maturity.

The maturity lock-in period of NSC is 5 years, and it 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 and 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. However, 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 government-sponsored savings plan aims to provide a steady and safe income source for senior citizens after 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.

Due to the government’s backing, the risk involved is negligible; 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 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, no penalty is charged for an early withdrawal in case of the individual’s demise. 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)

Fixed deposits are another reliable tax-saving option, an age-old trusted investment method. 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. However, under Section 80C of the Act, the investor can claim a tax exemption on the amount invested in an FD up to ₹1.5 lakh. This mode of investment is best for those with 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 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 7-8% per annum.

The campaign aims 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 girl’s education and marriage. As per Section 80C of the Income Tax Act, the amount invested, maturity proceeds, withdrawal amount, and the interest accrued are 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 insurance plans 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, the deduction is ₹25,000.

Also, if the insured and the parents are both over 60, an additional deduction of ₹50,000 is permitted. This implies a tax benefit of ₹1 lakh on health insurance premiums.

Interest in Home Loans

Buying a house is not only future security but 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 instead of 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. When choosing the best tax saving investment strategy, factors such as the fund’s safety, liquidity, and magnitude of returns should be considered.

Most 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 receive a monthly salary after retirement, you will need constant 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 and 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, you should first calculate the tax-saving expenses such as home loan repayments, life insurance premiums, tuition fees for children, etc., and then assess whether 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 investment type depends on an individual’s goal, risk appetite, liquidity, and age. So, you should prudently consider all aspects and opt for a scheme that best suits your needs.

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