Tax planning is an important aspect of your financial planning. When you plan your taxes efficiently, you can increase your income. Hence, tax-saving investment options play an important role in your yearly investment decisions. The Income Tax Act, 1961 has provisions of the tax deduction for various investment options under various sections. Let’s list out some of the best tax-saving investments that can help you reduce your tax outgo.
Best tax saving investments
Some of the most popular tax-saving investment options for individuals are listed out under Section 80C of the Income Tax Act, 1961. Under this section, you can claim up to the limit of INR 1.5 lakhs in a financial year. Let’s take a look at some of the popular investment options that qualify for tax deduction under this section:
- ELSS Mutual Funds
Equity Linked Saving Schemes are the type of diversified equity mutual funds that offer tax benefits along with the benefit of capital appreciation over the long-term period. However, ELSS funds come with the shortest lock-in of three years in comparison to other tax-saving investments. That means you can liquidate your investment only after the completion of three years of investment. You can invest in a lump sum or via systematic investment plans (SIPs) in ELSS funds. ELSS funds have the potential to deliver an inflation-adjusted return over the long run which can be considered as a great investment choice not only to save tax but also for your long-term goals. Also, long-term gains from ELSS, if not exceeding INR 1 lakh a year qualifies for tax exemption.
- Unit Linked Investment Plans
Unit Linked Investment Plans, popularly known as ULIPs are the hybrid products offered by the insurance companies that offer the triple benefit of investment, insurance, and tax saving. ULIPs are the market-linked investment products that invest a major part of the premium into a variety of funds or investment options chosen by you. ULIPs are the most flexible and transparent investment options. You can select the combination of funds based on your goal and risk appetite. However, your investments are locked in for five years in this tax-saving investment option. It allows you to switch from one fund to another depending on your assessment of market conditions, allows you to make partial withdrawals after the completion of the lock-in period to meet urgent liquidity requirements if any. ULIP proceeds are tax-free under Section 10(10D) of the IT Act.
- 5-year Bank Fixed Deposits
Five-year bank fixed deposits are one the popular and most preferred tax-saving instruments of conservative investors. This tax-saving investment comes with a lock-in period of five years. As the investment is in low-risk fixed income bearing instruments, returns are also fixed. Currently, bank FD would give you 5% to &7% p.a. interest. However, the proceeds on maturity are taxable.
- National Pension System (NPS)
National Pension System is a government-sponsored voluntary pension scheme that helps you contribute towards pension account over a period to secure your post-retirement life. There are two types of NPS account – Tier I and Tier II. In this tax-saving instrument, you can save tax extra by availing an additional deduction of INR 50,000 on your investment. That means you can avail of a deduction of up to INR 2 lakhs on contributions made in a financial year.
- Public Provident Fund (PPF)
PPF is one of the most preferred and popular tax-saving investments that help you create a financial cushion for your golden years. Contribution to PPF qualifies for tax deduction under Section 80C of the Income Tax Act. Interest earned and maturity proceeds of PPF are exempted from taxation. The maturity period of PPF is 15 years which can also be extended for 5 years. PPF is one of the safest investment options designed for the long term. However, withdrawals are allowed after 7 years of investment.
Apart from these investment options to save tax, there are many popular investments like Sukanya Samriddhi Yojana, National Savings Certificate and senior citizen saving scheme, etc. Plan your investments today and save taxes.