Tax Planning is an integral part of Financial Planning, where you have to make the best use of various tax exemptions, deductions and benefits available to limit the overall tax liability over a year. There are many top tax-saving investments available under Sec 80C, 80D, 80EE through which you can avail the benefits.
In this blog, we will look at all those investment options, which not only will help you to save tax but also generate a tax-free income for you over the long term.
Starting with the risk-free tax-saving investments.
Public Provident Fund (PPF)
It is one of the oldest and is still one of the preferred retirement plus tax-saving scheme in the country. This scheme is guaranteed by the government and can be opened easily in any branch of the nationalised bank or at a post office. Key features of the scheme are:
- Offers an interest rate of 7.9% p.a. (subject to revision every quarter)
- Has a lock-in period of 15 years, but can raise a loan against it after the third financial year
- Contributions made under the scheme qualifies for tax deductions under Sec 80C
- Both interest earned and maturity proceeds are exempt of tax
Employee Provident Fund (EPF)
Employee Provident Fund or EPF is only offered to the salaried class, and the account is opened by respective employers. The primary function of EPF is to build a sound retirement corpus for the salaried class, which can be withdrawn at the time of retirement. Some of the key features of EPF are:
- Both the employee and the employer contributes 12% of the employee’s salary (Basic + DA) each month mandatorily to the EPF account
- The interest rate offered on EPF account is 8.65% (subject to periodic review)
- The whole maturity proceeds are exempt from tax
- The employee’s contribution qualifies for tax deduction under Sec 80C
Here, an employee can also opt for Voluntarily Provident Fund (VPF) which is just an extension of an EPF account. Under this option, the employee can make an additional contribution of up to 100% of his/her Basic and DA.
The additional contributions made under VPF option are not tax-free (if crossed the 80C limit), the full maturity proceeds at the time of retirement is exempt from tax.
National Saving Certificates (NSC)
The National Saving Certificates VIII issue offers a tax benefit to the users as well as provide handsome returns on the investment. Some key features of the scheme:
- Offers an interest rate of 7.9% which is compounded annually
- The investment in NSC has a lock-in period of 5 years
- Deposits made under the scheme qualifies for tax deductions under Sec 80C
- Maturity proceeds are also exempted from tax
- The minimum investment amount is Rs 100 and there is no limit on the maximum investment amount
Sukanya Samridhi Account
This scheme was introduced by the government under Beti Bachao, Beti Padhao Yojana, offering attractive returns and tax benefits to the parents of a girl child for investing in the scheme. Some key features of this scheme are:
- The account can be opened in the name of girl child of age 10 & below
- A guardian or parent can open only one account in the name of a girl child and a maximum two account in the name of two different girl child
- Rate of interest offered under the scheme is 8.4% and is calculated on a yearly basis
- Partial withdrawal is allowed after the girl child attains the age of 18 and full withdrawal after the girl child attains the age of 21
- The minimum deposit is Rs 1000 and the maximum deposit is Rs 1.5 lakh in a financial year. Subsequent deposit in multiple of Rs 100 after that.
- The scheme has been given the EEE tax status, which means deposits, interest earned and returns at maturity is fully exempt from tax. The deposits qualify for tax-deduction under Section 80C.
Fixed Deposits Under Tax Saving Scheme
Its a special term deposit account offered by almost every nationalised bank, having a minimum and maximum tenor of 5 years and 10 years respectively. Key features of the scheme are:
- The interest rate offered on deposit is at the prevailing rate of term deposits of same tenor
- The interest rate is compounded quarterly on deposits
- The minimum deposit allowed under this scheme is Rs 1000 and the maximum deposit is Rs 1.5 lakh in a year
- The tax benefit is allowed under Sec 80C
- No premature withdrawal is allowed under the scheme
National Pension Scheme
It’s a low-cost retirement fund invests in equity, govt. bonds, corporate bonds and alternative investment. This scheme can be opened by any Indian citizens in the age bracket of 18-60. The scheme matures when the subscriber reaches the age of 60.
Tax Benefits Offered:
- Investments of up to Rs 1.5 lakh are exempt from tax under Sec 80C
- Additional tax benefit of Rs 50,000 is offered under Sec 80CCD(1b)
- Returns earned on the investment in NPS is completely exempt from tax
Life Insurance Plans and ULIPs
Life insurance schemes like an endowment plan or money-back or whole life insurance or ULIPs offer significant benefit in terms of both risk coverage and sum assured at the end of the policy tenure.
Premiums paid on the life insurance policy and ULIPs qualify for tax deduction under section 80C, and returns are also exempt from tax.
Non-Risk-Free Tax Saving Investments
Equity Linked Saving Scheme (ELSS)
ELSS Funds are tax-saving diversified mutual funds which invest the majority of its asset in equity assets. The only difference from equity funds is that the investment has a lock-in period of 3 years.
The deposits made are tax-deductible under Section 80C and gains from the investment are treated as long term capital gains or LTCG.
LTCG gains up to Rs 1 lakh is completely tax-free and above that, is taxed at 10%.
Other Tax Saving Avenues Beyond Sec. 80C
There are other tax-saving instruments which are not covered under the provisions of Sec 80C. Following are the schemes through which you take tax benefit under different Section of Income Tax Act:
- Health Insurance under Sec 80D
- Home Loan Repayment deduction under Sec 80EE
Lastly, I want to mention that, tax planning is beneficial if it is done from the start of the financial year, rather being left for the last minute hurry. Through effective tax planning and investing in any of the mentioned top tax-saving investments schemes, you can build a sound corpus which will eventually help you to meet your financial goals.