Tax saving is a prime tool for many investors, to prevent the erosion of the total income generated. There are various instruments that provide this benefit, thereby, significantly increasing the effective investment port-folio in this country as all individuals want to avail this advantage. In this article, I will talk about the best tax saving options that can reduce your tax outgo. Read on! 

Equity Linked Savings Scheme (ELSS)

Equity-linked savings scheme is one of the most popular market investment tools among investors with the primary aim of tax saving. It is one of the best ways to save tax under section 80C, as well as earn substantial returns by gaining market advantage.

Tax saving ELSS funds invest at least 80% of the total portfolio on equity securities, thereby, yielding the highest return amongst any other similar instruments available in the market. This scheme comes with a mandatory lock-in period of three years on an investment amount. Under section 80C, the following provisions are made to ensure substantial tax reduction on funds related to the ELSS scheme. 

  • The total principal amount invested in ELSS is exempt from taxation, provided the amount is under Rs. 1.5 Lakh. 
  • Any capital gains less than Rs. 1 Lakh is not charged with long term capital gains tax. 

Tax saving ELSS funds are relatively liquid instruments when compared to other securities available under the same umbrella. 

Public Provident Funds (PPF)

Public provident fund is one of the best tax-saving instruments u/s 80C, sponsored by the Government of India. However, PPF comes with a mandatory lock-in period of 15 years. This might harm the liquidity requirements of an investor. 

The PPF interest rate earned on this tax saving instrument is announced by the government every quarter and remains fixed for the given period. PPF forms a fixed return instrument, as it provides assured interest declared by the central government. 

A maximum of Rs. 1.5 Lakh can be invested in a PPF account in one financial year, through a lump sum or monthly investments. The entire amount can be exempted from taxation, thereby, making it one of the best tax-saving investments under Section 80C. Any interest earned on an investment amount is also not considered for tax calculations. 

Senior Citizen Savings Scheme (SCSS)

Senior Citizens Savings Scheme is also one of the best tax-saving investments u/s 80C, as it enables you to enjoy SCSS tax deduction of up to Rs. 1.5 Lakh on an investment amount. However, the eligibility criteria of this scheme are more rigid than other instruments. Only people satisfying the following criteria can avail this investment tool:

  • Individuals aged 60 years and above
  • Individuals  above the age of 55 years availing voluntary retirement
  • Any individual above the age of 50 years employed in the defense sector of India  

The total amount that can be invested in an SCSS policy is Rs. 15 Lakh. The interest rate payable on an investment amount is determined by the Central Government of India, and therefore, poses as a stable return on investment. 

Sukanya Samriddhi Yojna (SSY)

Sukanya Samriddhi Yojna poses as one of the best ways to save tax under section 80C of the Income Tax Act.  The SSY tax benefits amount up to Rs. 1.5 Lakh per annum. However, an account under the Suaknya Samriddhi Yojna can only be opened by a person having a daughter who is less than ten years old. 

As a part of the ‘Beti Bachao Beti Parhao’ policy, interest rate provided by the government on this amount is higher than other government-mandated instruments such as Public Provident Fund. Any investment which is higher than Rs. 1.5 Lakh in a year is not considered for SSY tax benefits. 

Tax Saver Fixed Deposit (FD)

Fixed deposits with a lock-in maturity period of five years are eligible for tax exemptions under Section 80C. It is one of the popular investment tools among risk-averse individuals, as it assures guaranteed returns at a fixed interest rate. 

However, it should be kept in mind that any premature withdrawals made nullify any tax benefit on such investments. Interest earned under this scheme is taxable. 

National Pension Scheme (NPS)

National Pension Scheme is a systematic investment policy aiming to provide financial security to investors on retirement. It is one of the best tax-saving investments under Section 80C, with a claim deduction of up to Rs. 1.5 Lakh on the total principal amount. The national pension scheme accepts funds from both employers and employees in the case of salaried individuals. 

Under Section 80CCD (1), a tax-free investment can be made by an employee up to 10% of his/her salary. For self-employed individuals, NPS tax benefits of an additional Rs. 50,000 can be claimed under Section 80CCD (1B). 

Funds invested in an NPS account can be partially reinvested in equity schemes, subject to the discretion of an investor. 

National Savings Certificates (NSC) 

National savings certificate aim to provide secure investment to individuals wary of stock market fluctuations. The tax-saving benefits under this policy are immense, with exemptions of up to Rs. 1.5 Lakh on the principal amount and the reinvested interest amount. The maturity period on this investment remains fixed at five years and ten years and is up to an investor to choose between any of the two periods. 

Unit Linked Insurance Plans (ULIP)

Unit linked insurance plans are also one of the best tax-saving investments under Section 80C available in the market, with exemptions on both investment and premium amounts payable.

The portion of money dedicated towards the investment part under this scheme is entitled to tax redemption of Rs. 1.5 Lakh, along with 10% of the total premium (provided the value is less than Rs. 1.5 Lakh). 

Life Insurance

Under section 80C, a premium paid on a life insurance policy is deductible under the income tax calculations.  The total amount allocated towards premium payments should not exceed Rs. 1.5 Lakh to avail this tax exemption benefit

Comparison Of Various Tax Saving Instruments 

INSTRUMENT LOCK-IN PERIOD       (years) RETURN TAX EXEMPTION 
ELSS 3 Market oriented  1.5 Lakh on principal 
PPF 15 Fixed (depends upon the interest set by the government) 1.5 Lakh on principal
ULIP 5 Fixed (depends upon the interest set by the government) 1.5 Lakh on  principal

1.5 Lakh on insurance premium 

SSY 21  Fixed (depends upon the interest set by the government) 1.5 Lakh on principal
SCSS 5 Fixed (depends upon the interest set by the government) 1.5 Lakh on principal
NPS Can only be drawn when the individual attains the age of 60. Fixed (depends upon the interest set by the government) 1.5 Lakh on principal
LIFE INSURANCE Depends upon the scheme chosen by an individual Fixed (depends upon the interest set by the insurance company) 1.5 Lakh on insurance premium
NSC 5 or 10 years Fixed (depends upon the interest set by the government) 1.5 Lakh on the principal
FIXED DEPOSIT 5 Fixed (depends upon the interest set by the concerned financial institution) 1.5 Lakh on principal

All these tools aim to provide tax exemptions to investors. However, the returns remain fixed under all instruments except the ELSS plan, as it is market-oriented. Tax saving ELSS funds offer the highest returns as its portfolio primarily comprises equity-oriented schemes. It comes in with a mandatory lock-in period of three years, giving it enough exposure to the stock market to realize substantial profits. 

Conclusion

While there are multiple ways you can save tax, it is wise to select an option that offers you dual benefits of tax saving as well as wealth creation. Remember to plan your taxes in advance, seek the best way to optimize your taxes and utilize the tax exemption limit completely.

Happy Investing! 

Disclaimer: The views expressed in this post are that of the author and not those of Groww