India has a vast array of investment opportunities available to its citizens. From traditional investment options such as fixed deposits and mutual funds to more unconventional options such as cryptocurrencies, there is something for everyone. One area where Indians can make significant savings is by investing in tax-saving investment options. In this blog, we will explore the various tax-saving investment opportunities available in India.
Before we delve into the specifics of tax-saving investment options, let us first understand why tax saving is important. Taxes are an integral part of any economy, and India is no exception. The government of India levies taxes on various transactions and activities, which it uses to fund various development and welfare programs. While taxes are essential for the smooth functioning of the economy, they can also be a significant burden on individuals, especially those with limited income.
This is where tax-saving investment options come into the picture. These investment options not only help individuals save on taxes but also provide them with an opportunity to grow their wealth over the long term. Moreover, investing in tax-saving instruments also helps individuals inculcate the habit of disciplined savings.
So, without further ado, let us look at some of the tax-saving investment options available in India.
You can invest in various tax saving schemes. The following are some of the investment options that you can choose from:
Public Provident Fund :
PPF is a long-term savings scheme with attractive returns and tax benefits. Under this scheme, an investor can deposit up to Rs 1.5 lakh every year in his/her name or jointly with spouse. The maturity period for PPF is 15 years, but one can withdraw money before maturity if required in emergency with all valid proof of documents. You need not pay any tax on interest earned on deposits made nor on the Investment under this scheme until maturity or withdrawal from it; however, there will be no deduction available under Section 80C of IT Act 1961 for such deposits made after April 1st 2018 onwards by an individual taxpayer who does not opt for TDS option while depositing funds into PPFs account. PPF Account can be opened in any Bank or Post office with a minimum Investment of Rs 500. For keeping the PPF Account activated, one needs to deposit at least Rs 500 every month. Otherwise, a penalty of Rs 50 along with Minimum deposit of Rs 500 needs to be deposited again.
Equity Linked Savings Scheme :
Equity-Linked Savings Scheme (ELSS) is a type of mutual fund that invests in stocks and bonds. Thus, Investor can expect slightly extra return since it invests in market which has higher potential to give returns. It offers the following tax benefits:
Tax deduction under Section 80C of the Income Tax Act, 1961upto 1.5Lac
Exemption from long-term capital gains tax on equity funds held for more than 12 months.
Tax-free dividend for investors who hold units for 3 years or more.
Relatively Higher Return of around 10-15% annually.
Moderate Risk in comparison with direct investment in Equity market.
Relatively Less Lock in Period of 3yrs only.
Returns above 1lac are taxable under long term Capital gain Tax of 10%
National Pension Scheme (NPS) :
NPS is a defined contribution pension scheme. It offers tax benefits under Section 80C of the Income Tax Act, 1961. The maximum amount that can be invested in NPS is Rs 1.5 lakh per financial year (FY). The lock-in period for NPS investments is 15 years and it cannot be withdrawn before this period ends unless there are exceptional circumstances or medical emergencies. Withdrawals from NPS will be exempt from tax if you have contributed for at least five years prior to withdrawal and have attained 55 years of age at the time of withdrawal or death, whichever comes earlier. In case you do not fit into either category, then there would be no exemption from taxes on withdrawals made from your account in NPS. Investor can also claim additional up to Rs 50000 under section 80CCD(1B). Along with this the Investor can claim 10% of Basic Salary with no limit under section 80CCD (1). If the Investor have been investing in NPS in last 3 years, then the investor can withdraw up to 25% for certain purpose like Children’s wedding, Higher studies, Medical Treatment etc.
The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. You can allocate a maximum of 50% of your investment to equities. There are two options to invest in – auto choice or active choice. The auto choice decides the risk profile of your investments as per your age. For instance, the older you are, the more stable and less risky your investments. The active choice allows you to decide on the scheme and to split your investments.
Senior Citizen Saving Scheme (SCSS) :
This Scheme is for Individuals who are 60 years old or above on January 1st of any given financial year or above 55 Years but have retired early under Voluntary Retirement Scheme (VRS), then you are eligible for SCSS investments. This scheme offers an interest rate of 8 Percent with quarterly pay-out with guaranteed Return.
As per the latest Union Budget, the minimum Deposit is Rs 1000 with Maximum Deposit has been enhanced from 15lakh to 30 lakhs. Senior citizens resident in India can invest a lump sum in the scheme, individually or jointly, and get access to regular income along with tax benefits up to 1.5Lac under Section 80C. It is a Post Office savings scheme. Senior citizens can open an SCSS account to get the benefits of the SCSS. They can open an account in a Post Office branch or an authorised bank.
The maturity period of SCSS is 5 years. However, individuals can extend the maturity period for 3 more years by submitting an application. The application for extension of maturity should be given in the 4th year. Individuals can open more than one SCSS account. They may open another account either by themselves or a joint account with their spouse. Individuals can withdraw the amount after one year of opening the account. There is no charge for premature closure of the account within one year of opening it. However, a 1.5% charge will be deducted from the principal amount if the account is closed after one year but within two years of opening it.
Life Insurance/Health Insurance & ULIP :
A life insurance policy is a contract between an insurance company and an individual, where the individual pays a premium in exchange for a sum of money to be paid to their beneficiaries upon their death. The purpose of life insurance is to provide financial protection to one's loved ones in the event of an unexpected death.
Whereas a health insurance policy is a contract between an individual and an insurance company, where the individual pays a premium in exchange for coverage of medical expenses. The purpose of health insurance is to provide financial protection against the cost of healthcare services and treatments.
ULIP stands for Unit Linked Insurance Plan. It is a type of life insurance policy that combines insurance coverage with investment opportunities. A portion of the premium paid by the policyholder is used to provide insurance coverage, while the remaining portion is invested in various investment funds such as equity, debt, or a combination of both.
Premium Paid for Life Insurance, Health Insurance & ULIPs for yourself or family member (Parents & Spouse) are eligible to take tax deduction under 80C under Income Tax Act 1961 upto 1.5 Lac in one Financial Year.
Sukanya Samriddhi Yojana (SSY) :
Sukanya Samriddhi Yojana (SSY) is a savings scheme for the girl child. It was launched by the government in November 2015 to encourage parents to invest in their daughters' future and help them build a secure financial future. The scheme offers tax benefits under Section 80C of the Income Tax Act, 1961. The investment made under this scheme qualifies for deduction from your taxable income up to Rs 1.5 lakh per annum under Section 80C of the IT Act.
The Interest Accrued & Maturity amount are exempted from Tax. A SSY Account can be opened under this scheme in the name of Girl child till she attains the age of 18 Years or 21 Years. The Interest rate is 7.6% & the minimum investment amount is Rs 250 to maximum of 1.5 Lakh per annum. A single girl child cannot have multiple SSY account. The Account can be opened is post offices & designated Public & Private banks.
Fixed Deposits :
FDs are one of the most popular investments in India. They are a safe and secure way to park your money, and you can earn a fixed rate of interest on them. You can claim tax benefits on FDs if you have opened a Tax Saving FD with you bank having the minimum lock in period of 5Years. The Tax Saving FD are eligible for Tax deduction up to 1.5 Lac per Financial Year.
The Interest earned on Tax Saving FD are taxable as per the Income tax Slab. It is important to note that premature withdrawal of the FD before the end of the lock-in period is not allowed, and if withdrawn, a penalty may be levied. It is important to carefully compare and review the interest rates offered by different banks and financial institutions before choosing a tax-saving FD.
National Savings Certificates :
National Savings Certificate (NSC) is a government-backed savings scheme in India that allows individuals to invest in a fixed deposit-like instrument while saving on taxes. NSC investments have a lock-in period of five years, and the amount invested is eligible for a tax deduction of up to INR 1.5 lakh under Section 80C of the Income Tax Act.
The lock in period of NSC is 5years with interest rate of 7%. The investment can be made in denominations of INR 100, INR 500, INR 1,000, INR 5,000, and INR 10,000, making it accessible to a wide range of investors.
The interest earned on NSC investments is taxable and forms a part of the investor's total income. Therefore, individuals should carefully review and compare the interest rates offered by different savings schemes before deciding.
S no | Options | Interest | Lock-in Period | Guaranteed Returns | Risk Profile |
1 | ELSS funds | 12-15% (estimated) | 3 years | No | High |
2 | PPF | 7.90% | 12 years | Yes | Low |
3 | NPS | 8-10% (estimated) | Till retirement | No | High |
4 | NSC | 7% | 5 years | Yes | Low |
5 | FD | 7-8% | 5 years | Yes | Low |
6 | ULIP | 8-10% (estimated) | 5 years | No | Moderate |
7 | Sukanya Samriddhi | 7.60% | 21 years | Yes | Low |
8 | SCSS | 8% | 5 years | Yes | Low |