When it comes to taxes, saving money is always a good idea. One way to do this is by taking advantage of the tax benefits offered by investing in certain financial instruments. Under Section 80C of the Income Tax Act, there are several investment options available that can help you reduce your tax liability.
Some of these options include investing in tax-saving mutual funds, National Savings Certificates, Public Provident Fund, and Equity-Linked Saving Scheme. These investment options not only provide tax benefits but also help you grow your wealth over time.
So, if you want to save tax and build wealth, investing in these options can be a smart move. Just remember to do your research and choose the option that best fits your financial goals and risk appetite.
Lets look at the 8 instrument through which you can save taxes.
1. Public Provident Fund
Public Provident Fund (PPF) is a low-risk retirement savings scheme offered by the Indian Government. It has a lock-in period of 15 years, but partial withdrawals are allowed after 7 years. PPF has a fixed annual return, currently set at 7.10% p.a. by the government.
The scheme is considered a safe investment option for those who want to build a retirement corpus. Additionally, PPF offers tax benefits, including tax exemption on the investment amount, interest earned, and maturity amount.
This makes it a tax-efficient option for those looking to save on taxes while building wealth for their retirement. However, investors must keep in mind that the returns are not very high compared to other investment options such as equity, mutual funds, or fixed deposits.
Nonetheless, the low risk and tax benefits make PPF an attractive investment option for conservative investors.
2. The Voluntary Provident Fund (VPF)
The Voluntary Provident Fund (VPF) is a savings option for employees under the Employee Provident Fund Organization (EPFO). It is a voluntary contribution made by the employee towards their retirement fund. The VPF has a lock-in period of 5 years, but partial withdrawals are allowed in the form of loans from the account.
The VPF is considered a low-risk investment option and currently offers a fixed annual return of 8.10% p.a., which is set by the government annually. Similar to the Public Provident Fund (PPF), the VPF also offers tax benefits, including tax exemption on the investment amount, interest earned, and maturity amount.
However, if the contribution towards EPF/VPF exceeds Rs. 2.5 lakh in any year, the interest earned on the excess contribution becomes taxable.
Nonetheless, the VPF is a good investment option for those who want to save for their retirement with a relatively low-risk investment option that also offers tax benefits.
3. National Pension System (NPS)
The National Pension System (NPS) is a government-sponsored pension scheme designed to provide retirement benefits to citizens. It is a medium-risk investment option that offers a variable rate of return. Partial withdrawals are allowed after three years, but only for specific reasons, making it less liquid than some other investment options.
The NPS offers tax benefits, with investment, interest earned, and maturity amount being tax-exempt. However, only Tier I contributions are eligible for tax exemptions. The NPS is considered a good option for those who want to build a retirement corpus, especially for those who are self-employed or do not have a pension plan from their employer.
The scheme offers flexibility in terms of investment options, including the choice of asset classes and fund managers. However, investors should keep in mind that the returns are subject to market risks, and the performance of the scheme can vary depending on market conditions.
Nonetheless, the NPS can be a good investment option for those who want to diversify their portfolio and save for their retirement.
4. Equity Linked Savings Scheme (ELSS)
Equity Linked Savings Scheme (ELSS) is a high-risk investment option that offers tax benefits to investors. It is a diversified equity mutual fund that comes with a mandatory lock-in period of 3 years.
ELSS has a variable rate of return, which can be affected by market conditions. The scheme offers tax benefits, with investment and maturity amount being tax-exempt. However, the returns earned are taxable. Nonetheless, Long Term Capital Gains up to Rs. 1 Lakh in a Financial Year are Tax-Exempt, making it a tax-efficient option for investors.
The ELSS is considered a good investment option for those who are looking for a high-risk investment option that can provide higher returns than other investment options, such as fixed deposits or debt funds.
However, investors should keep in mind that the performance of the scheme is subject to market risks and can be affected by market conditions. Nonetheless, ELSS can be a good option for those who want to diversify their portfolio and save on taxes while investing in equity.
5. Five-Year Tax Saving Bank Fixed Deposit
The Five-Year Tax Saving Bank Fixed Deposit is a low-risk investment option that comes with a tax break. Tax-saving FDs work like regular fixed deposits, with a lock-in period of 5 years. The returns on tax-saving FDs are fixed and depend on the bank offering the scheme.
Tax-saving FDs offer tax benefits, with investment and maturity amount being tax-exempt. However, the interest earned is taxable. The tax-saving FD is considered a good investment option for those who are looking for a low-risk investment option that can help them save on taxes.
It is a good option for those who do not want to take market risks but still want to invest in tax-saving options. However, investors should keep in mind that the returns on tax-saving FDs are typically lower than other investment options, such as equity or ELSS.
Nonetheless, tax-saving FDs can be a good option for those who want a stable and safe investment option while also saving on taxes.
6. National Savings Certificates (NSC VI-Issue)
The National Savings Certificates (NSC VIll-Issue) is a low-risk investment option that is offered by the Indian Government as a savings bond. The scheme comes with a lock-in period of 5 years, and the returns are fixed, with rates set by the government quarterly.
NSC offers tax benefits, with the investment amount and interest earned in the first 4 years being tax-exempt. However, the interest earned in the 5th year is taxable. NSC is considered a good investment option for those who are looking for a safe and low-risk investment option that can provide guaranteed returns.
It is a good option for those who do not want to take market risks but still want to invest in tax-saving options. The scheme offers a fixed rate of return, which can provide a stable and predictable source of income for investors.
However, investors should keep in mind that the returns on NSC are typically lower than other investment options, such as equity or ELSS. Nonetheless, NSC can be a good option for those who want a safe and secure investment option while also saving on taxes.
7. Unit Linked Insurance Plan (ULIPs)
Unit Linked Insurance Plan (ULIPs) is an investment option that provides both insurance coverage and investment exposure in equities. ULIPs come with a lock-in period of 5 years, which makes it a long-term investment option. The returns on ULIPs are variable and depend on the product selected.
ULIPs offer tax benefits, with investment, interest earned, and maturity amount being tax-exempt. However, if the annual premium exceeds Rs. 2.5 lakh in any year during the term of the policy, the proceeds of such ULIPs shall be taxable.
ULIPs are considered a good investment option for those who want to invest in equities and also get insurance coverage. ULIPs provide investors with the opportunity to participate in the equity markets while also providing life insurance coverage.
ULIPs are a good option for those who have a long-term investment horizon and can take moderate risks. However, investors should carefully select the ULIP product as the returns can be variable and depend on the performance of the equity markets.
8. Sukanya Samriddhi Yojana (SSY)
Sukanya Samriddhi Yojana (SSY) is a small deposit scheme for the girl child that comes with a low-risk profile. The scheme offers a return of 7.6% p.a. (rates set by the government quarterly) and provides tax benefits as the investment, interest earned, and maturity amount are tax-exempt.
SSY has a lock-in period of 21 years, making it an excellent investment option for those who want to invest for their daughter’s future. However, up to 50% of the deposit amount can be prematurely withdrawn once the girl reaches the age of 18 years.
SSY is a good investment option for parents who want to save for their daughter’s future expenses like education and marriage.
The scheme is designed to provide financial security to the girl child and help parents build a corpus over the long term. With SSY, parents can avail the tax benefits while securing their daughter’s future.
