Top 10 Tax Saving Investment Options in India

As a responsible citizen of India, every individual who enjoys a steady stream of income flow is liable to pay income tax, which can be considered as an annual fee levied by the Government of India. By law, every individual and business needs to file their Income Tax Returns every year to assess their tax obligations, if any.

For instance, individuals with a net annual income of up to Rs. 2.5 Lakh are exempt from paying any Income Tax, but they need to file the ITR. Individuals with annual income beyond Rs. 2.5 Lakh, are liable to pay anywhere between 5% to 30% of their income towards Income Tax, in addition to the applicable education cess.

For obvious reasons, every individual and business would wish to save as much as possible on these taxes. If you too happen to be on the lookout for investment alternatives which can help you enjoy some much-needed tax-exemptions, you have found just the right place.

Here are 10 of the most promising tax saving investment options that you can avail in India.

1. Equity Linked Savings Scheme or ELSS Funds

An ELSS can essentially be defined as a diversified Equity Mutual Fund, with the large majority of the corpus invested in equities. This mutual fund type comes with a lock-in period of 3 years from the date of investment and allows for a deduction claim of up to Rs. 1.5 lakh of the investment from your gross annual income, under Section80C of the Income Tax Act. Given the short lock-in period, the return on investment for ELSS can be termed as the highest among all other investment options listed hereunder.

While the 10% tax rate is only applicable on returns beyond Rs. 1 lakh, this liability can be effectively reduced by regularly harvesting the capital gains.

2. National Pension Scheme

When it comes to the National Pension Scheme, as per the new guideline, the entire amount, i.e., 60% of the corpus that is withdrawn by the candidate at the time of retirement is free from any taxes. This exemption can be withdrawn at the end of the investment term. This is a great relief from the earlier cap of 40%.

Then again, investors are now allowed to allocate up to 75% to equities in the active choice alternative, which was restricted to a meagre 50% before. 

With NPS, you can conveniently save tax under 3 different heads, namely –

Section 80C, wherein contributions of up to Rs 1.5 lakh can be claimed as a deduction.

Section 80CCD(1b), wherein an additional deduction of up to Rs 50,000 can be claimed.

Up to 10% of your basic salary, if put towards the NPS by your employer, will be tax-exempt.

3. Public Provident Fund

Popularly known as PPF, the Public Provident Fund is essentially a savings instrument which was first introduced in the year 1968 by the National Savings Institute of the Ministry of Finance, with the aim to mobilise small savings by offering compelling returns and tax saving opportunities. This government-backed investment option is not only safe and flexible but also hassle-free. With a long tenure of 15 years, the compounding effect in PPF is rather significant and helps us great returns.

As far as tax benefits are concerned, you can claim a deduction of up to Rs. 1.5 lakh on the deposits made towards the PPF, in accordance with Section 80C. Furthermore, the interest earned on the PPF account is exempt from taxation.

4. Senior Citizens Savings Scheme

The Senior Citizens’ Savings Scheme is one of the most promising tax-savings schemes for individuals above the age of 60. This scheme is characterised by a high return of 8.7% (subject to quarterly revision), with a tenure of up to 5 years, which can be extended for another 3 years. The investment for this scheme is limited to Rs. 15 lakh per individual.

You can claim the tax deduction of up to Rs 1.5 Lakh on the deposits made towards the SCSS, in accordance with Section 80C. This deduction is only allowed in the financial year in which the deposit towards SCSS is made, and cannot be availed again, in case the term is extended.

You must duly note that the interest earned on SCSS is fully taxable. That being said, you can claim a deduction for up to Rs. 50,000 in a given financial year, under section 80TTB. Also, worth noting is the fact that if the interest received exceeds Rs. 10,000 per annum, TDS will be applicable on the same.

5. SukanyaSamriddhiYojana

This scheme was launched to aid the savings for taxpayers with a daughter aged 10 or below. Currently, the deposits towards the scheme accrue interest of 8.5%, albeit it is subject to change every quarter. The benefits of the SukanyaSamriddhiYojana by opening an account in any post office, or one of the designated banks. As is the case with PPF, even the SukanyaSamriddhiYojana has a cap of Rs. 1.5 lakh per annum on the investment. If a parent has two daughters, they may open two separate accounts, but the total investment in the two accounts combined cannot exceed Rs. 1.5 lakh in a given year. The account matures in 21 years since the date of issuance, or on the day of the account holder’s marriage, whichever is earlier.

If you open an account under the SukanyaSamriddhiYojana, you can claim a deduction of up to Rs. 1.5 lakh on the deposits made towards the account, in accordance with Section 80C. The interest accrued and the amount received on the date of maturity are both exempt from taxation.

6. ULIP

Short for Unit Link Insurance Plan, ULIP is essentially an integrated product offered by insurance companies which offers the dual benefit of insurance as well as investment. If you choose to invest money in ULIP, you can claim a deduction of up to Rs. 1.5 lakh, under Section 80C, i.e. life insurance, or under Section 80CCC i.e. pension. A key point to remember, is that you must regularly pay your premium and keep the ULIP plan going, in order to avail these tax benefits.

If you chose to discontinue the ULIP before 2 years, you wouldn’t be able to reap the benefits. If you have been allowed a deduction in the previous year, discontinuing the premium payment will lead to the already deducted amount being added back to your income in the year in which you close the ULIP.

7. Pension Plans

Pension Plans, also known as Retirement Plans, are known for offering dual benefits of investment as well as insurance, through regular investment over a specific period. Similar to numerous other investment schemes on this list, you can claim a deduction of up to Rs. 1.5 Lakh, under Section 80CCC (pension).

8. National Savings Certificates (NSC)

National Savings Certificates (NSC) is essentially a fixed income investment scheme, which can be availed at any post office across the nation. This scheme can be availed for two fixed maturity periods – 5 years and 10 years. A distinctive feature of the NSC is that there is no upper limit on the investment made. You can enjoy a fixed interest on your certificates to the tune of 8% per annum (subject to change).  You can claim a deduction of up to Rs. 1.5 lakh on your investments, under Section 80C of the Income Tax Act, as well as that on the interest earned.

9. Bank Fixed Deposits

Bank Fixed Deposits are one of the most reputable and trusted tax saving investments, which can earn an interest of 7.60 – 8.25% for regular taxpayers, and that of 8.10 – 8.75% for senior citizens. You can claim a deduction of up to Rs. 1.5 Lakh on your investments, under Section 80C of the Income Tax Act. However, the interest earned on banks deposits is fully taxable.

10. Life Insurance

If you are opting for a life insurance policy, you can claim a deduction of up to Rs. 1.5 Lakh on the premium paid towards the policy. However, you must remember that the deduction is only applicable if the amount of premium paid in a given financial year is at least 20% of the assured amount of the policy.

These are the top 10 compelling tax saving investment options available in India!

Also Read: Tax Saving Options for Salaried Individuals

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