People often keep in mind and invest in specific purposes such as buying a home and retirement. The returns from these investments can be substantial, but they also carry the risk of erosion due to inflation and taxes. Taxes, in particular, can wipe out a significant portion of your savings.
Hence, people prefer tax-saving investments. But when it comes to tax savings, one has many options to choose from. Listed below are some tax-saving investment options that you can choose from. Do note that all of the following saving investments come under the preview of Section 80C of the Income Tax Act, 1961.
Tax saving schemes ensure that you do not pay more taxes and make money in the long run by investing in savings-based schemes. Here are some great tax-saving options for your income tax deduction of up to ₹ 1.5 lakh this year.
This article covers:
- Unit Linked Insurance Plan (ULIP)
- Tax saver fixed deposits
- Equity-linked Savings Schemes (ELSS)
- Public Provident Fund (PPF)
- Sukanya Samriddhi Yojana (SSY)
- National Savings Certificate (NSC)
- National Pension System (NPS)
- A comparison table of all the above-mentioned schemes
Unit Linked Insurance Plan (ULIP)
ULIPs are investment options where you get the benefits of owning an insurance plan while gaining returns from it. Here, the periodical premiums paid are partly used to provide a safety net while the rest is invested in the market. The longer you stay invested, the higher your returns will be.
Tax benefit: The premium paid is not considered as a part of your total taxable income. Thus, the amount of tax you pay reduces. Moreover, the returns from ULIPs are not taxable. Deduction on ULIPs can be claimed for up to Rs. 1.5 lakh.
Note: Apart from these, even regular insurance plans with a lock-in period of three years are eligible for a deduction of up to Rs. 1.5 lakh. However, do not purchase an insurance policy solely to save on tax.
Tax saver fixed deposits
These are a kind of fixed deposits offered by banks, with a mandatory lock-in period of 5 yrs.
Tax benefit: Deductions on tax saver FDs can be claimed up to Rs. 1.5 lakh. However, the interest earned is taxable.
Equity-linked Savings Schemes (ELSS)
ELSS stands for equity-linked savings schemes. It is a kind of equity-based mutual fund that invests at least 65% of the portfolio in equities and comes under the preview of Section 80C with a mandatory lock-in period of three years. However, it must be noted that returns are not guaranteed as the fund is vulnerable to market fluctuations.
Tax benefit: Tax deductions of up to Rs. 1.5 lakh can be claimed. The LTCG from ELSS is not taxable if they are less than Rs. 1 lakh. If the returns exceed Rs. 1 lakh, they are taxed at 10%.
Public Provident Fund (PPF)
This is a Government operated scheme where individuals can deposit any sum between Rs. 500 to Rs. 1.5 lakh per annum into their account. The amount cannot be withdrawn for 15 yrs. After 15 yrs, the account must be renewed once every 5 yrs.
Tax benefit: PPF enjoys a triple tax exemption. Yearly deductions of up to Rs.1.5 lakh can be claimed, the interest earned on the deposit is tax-free, and the amount withdrawn at maturity is also completely tax-free.
Sukanya Samriddhi Yojana (SSY)
As a part of Beti Bachao, Beti Padhao campaign, the GOI in 2015 launched the SSY scheme. An account under this scheme can be opened and operated by the guardian of a girl child. Any amount between Rs. 250 to Rs. 1.5 lakh can be deposited into this account annually.
Tax benefit: SSY also enjoys a triple tax exemption- up to Rs. 1.5 lakh annually, on the interest earned and on withdrawal of the maturity amount.
National Savings Certificate (NSC)
It is a Government operated fixed income scheme run by post offices that has a mandatory lock-in period of 5 yrs.
Tax benefit: Tax deductions of up to 1.5 lakh can be claimed. For the first four years, interest earned from NSC is reinvested into the scheme and can be claimed as a deduction. However, after 5 yrs, the interest earned is taxable.
National Pension System (NPS)
NPS is a voluntary retirement scheme operated by the Government. Individuals are required to invest in this scheme on a periodical basis. At maturity, i.e., at retirement, they can withdraw a certain percentage of the fund. The remaining part is given as a pension on a monthly basis.
Tax benefit: A deduction of up to Rs. 1.5 lakh can be claimed annually for your and your employer’s contribution. An additional deduction of up to Rs. 50,000 can be claimed on any extra voluntary contribution you make.
A comparison table of all the above-mentioned schemes
| Investment | Lock-in period | Rate of return | Tax benefits |
Unit Linked Insurance Plan (ULIP) | 5 yrs | Varies from plan to plan | Up to Rs. 1.5 lakh annually |
| Tax-Saving Fixed Deposits | 5 yrs | 5-6% | Up to Rs. 1.5 lakh annually |
| ELSS (Equity Linked Savings Schemes) | 3 yrs | Varies from scheme to scheme | Up to Rs. 1.5 lakh annually |
PPF (Public Provident Fund | 15 yrs | 7.1% for FY 2021-2022(revised annually) | Up to Rs. 1.5 lakh annually, on interest earned and on maturity amount |
SSY (Sukanya Samriddhi Yojana) | 21 yrs | 7.6% (revised quarterly) | Up to Rs. 1.5 lakh annually, on interest earned and on maturity amount |
National Savings Certificate (NSC) | 5 yrs | 6.8% (revised quarterly) | Up to Rs. 1.5 lakh annually, interest taxed after 5 yrs |
National Pension System (NPS) | Until retirement | 9-12% | Up to Rs. 2 lakh |
Apart from these, individuals can also claim tax exemptions for the following:
- Deduction on interest on housing loan for up to Rs. 50,000
- Deduction on the principal amount of home loan for up to Rs. 1.5 lakh
- Deduction on health insurance premium for up to Rs. 25,000
Conclusion
Individuals constantly wonder about different methods through which they can save taxes. By investing in above-mentioned schemes, not only can you avail the innumerable tax exemptions, deductions, and claims, but also build yourself a safety net for the future. Do thorough research and due diligence before investing in these schemes, as most of them do have lock-in periods. Consult your financial advisor before investing in any scheme or fund.