Top 10 Tax Saving Investments to Grow Your Wealth and Reduce Your Tax Burden

Although there are numerous effective methods to minimize taxes and maximize savings, many individuals tend to put off tax planning. A more intelligent approach would be to begin investing during the early stages of the financial year, allowing ample time for sensible planning and maximizing returns on various tax-saving investments.

When selecting appropriate tax-saving investment plans, it is crucial to take into account factors such as safety, returns, and liquidity. Here are some tax saving investment options that you can consider. 

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10 Tax Saving Investments To Save Your Income Tax

Listed below are the 10 best tax saving investments:

1. Public Provident Fund 

The Public Provident Fund, sponsored by the Indian Government, is among the top tax-saving instruments under Section 80C. However, investing in PPF comes with a mandatory lock-in period of 15 years, which may adversely affect an investor’s liquidity requirements.

PPF is a fixed return instrument, with the interest rate determined by the government every quarter and remaining constant for the duration. This makes it a reliable investment option, as it guarantees a predetermined interest rate declared by the central government.

Investors can invest up to Rs. 1.5 lakh in a PPF account in a financial year, either as a lump sum or through monthly instalments. The entire investment amount is exempt from taxation, making it an attractive tax-saving investment under Section 80C. Additionally, any interest earned on the investment amount is also tax-free.

2. Tax Saving Fixed Deposit 

Investments in fixed deposits that have a lock-in maturity period of five years are eligible for tax exemptions under Section 80C. This investment option is popular among risk-averse individuals as it offers guaranteed returns at a fixed interest rate.

It is important to note that any premature withdrawals made from these fixed deposits will nullify the tax benefits associated with this investment. Additionally, any interest earned under this scheme is taxable. 

3. Health Insurance 

Under Section 80D, you can receive a tax exemption based on the premiums paid for one or more health insurance policies purchased for your family (spouse and children) and parents. 

The policyholder can claim a deduction of up to Rs. 25,000 annually against the premium paid for health insurance for themselves, their spouse, and dependent children.

The deduction limit increases to Rs. 50,000 if the policyholder or their spouse is over 60 years old. If the policyholder is paying for a health insurance plan for their parents, they can claim an additional amount of Rs. 25,000, which increases to Rs. 50,000 if the parents are senior citizens. 

This limit also includes coverage of Rs. 5,000 for expenditure on health check-ups of family members, including parents, spouses, and dependent children.

4. National Pension Scheme 

The National Pension Scheme is a systematic investment policy that aims to provide financial security to investors upon retirement. It is considered one of the best tax-saving investments under Section 80C, with a deduction claim 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. Employees can make a tax-free investment of up to 10% of their salary under Section 80CCD (1). 

For self-employed individuals, additional NPS tax benefits of up to Rs. 50,000 can be claimed under Section 80CCD (1B). Investors have the option to partially reinvest funds from their NPS account into equity schemes, subject to their discretion. 

5. Term Insurance 

Term Insurance is a type of life insurance plan that offers financial coverage to the beneficiary of the insured person for a specified period. If the policyholder passes away during the policy term, the beneficiary can claim the death benefits from the insurance company.

Term life insurance policies provide coverage benefits as a lump sum or fixed payments for a limited period. They offer deductions under Section 80C of the Income Tax Act with additional deductions up to Rs. 1.5 lakhs. The death benefits received by the nominee are also tax-free.

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6. Senior Citizen Saving Scheme 

The Senior Citizens Savings Scheme is considered one of the best tax saving investments in India under Section 80C. That is because it offers a tax deduction of up to Rs. 1.5 lakhs on the investment amount. However, this scheme has more rigid eligibility criteria compared to other investment tools.

Only individuals meeting the following criteria are eligible to invest in this scheme:

  • Aged 60 years and above
  • Above the age of 55 years and availing of voluntary retirement
  • Above the age of 50 years and employed in the defence sector of India

The maximum amount that can be invested in an SCSS policy is Rs. 15 lakhs. The interest rate payable on the investment amount is determined by the Central Government of India, which makes it a stable return on investment.

7. National Savings Certificate 

The National Savings Certificate (NSC) is a government-sponsored savings scheme that offers a fixed income tax-saving investment option. This low-risk investment option guarantees a return on investment and can be opened with any post office. 

The NSC is designed to encourage mid-income investors to invest while providing tax benefits. The following are the tax benefits offered under the scheme:

  • Under Section 80C of the IT Act, an investor can claim a tax deduction of up to Rs. 1.5 lakh.
  • The interest earned on the certificates is added back to the initial investment and is eligible for tax exemption.

In the second year of investment, an investor can claim a tax deduction on the NSC investment of that year and the interest earned on the previous year. It is because the interest earned is added to the investment and is compounded annually.

8. Unit Linked Insurance Plans 

Unit Linked Insurance Plans (ULIPs) are investment plans that provide both insurance coverage and investment opportunities. They allow investors to invest in stocks, bonds, or mutual funds while providing insurance coverage. 

When an investor buys a ULIP, a part of the premium is invested in various securities while the remaining amount is used to provide insurance coverage. Premiums paid towards ULIPs are eligible for a tax deduction under Section 80C of the Income Tax Act. Additionally, the returns from ULIPs on maturity are exempted from income tax under Section 10(10D). This feature of ULIPs provides investors with dual benefits in terms of tax-saving and investment returns.

9. Sukanya Samriddi Yojana 

Sukanya Samriddhi Yojana can be considered one of the most efficient ways to avail of tax benefits under Section 80C of the Income Tax Act. The scheme allows for tax deductions of up to Rs. 1.5 Lakh per annum. However, only those who have a daughter under the age of ten can open an account under this scheme.

Aligned with the government’s ‘Beti Bachao Beti Padhao’ initiative, the scheme offers a higher interest rate compared to other government-backed instruments such as Public Provident Fund. Please note that any investment exceeding Rs. 1.5 Lakh in a year will not qualify for tax benefits under this tax saving investment option. 

10. Equity Linked Savings Scheme 

Equity-linked savings schemes are highly sought-after among investors seeking tax savings and market-linked returns. These schemes invest a minimum of 80% of their portfolio in equity securities, providing the potential for high returns. 

ELSS schemes have a mandatory lock-in period of three years, and tax benefits are available under section 80C. The total principal amount invested in ELSS is exempt from taxation, provided it does not exceed Rs. 1.5 Lakh. 

Besides, any capital gains less than Rs. 1 Lakh are not subject to long-term capital gains tax. Compared to other securities, ELSS schemes are relatively liquid.

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FAQs on Tax Saving Investments

Here are some frequently asked questions on tax saving investments:

What is a tax-saving investment?

A tax-saving investment is an investment that allows you to save tax by offering deductions on the amount invested or on the returns earned.

Why should I invest in tax-saving investments?

Investing in tax-saving investments helps you reduce your taxable income and save money on taxes. It also helps you build wealth and achieve your financial goals in the long run.

What are some of the popular tax-saving options for investments available in India?

Some popular tax saving investments in India include Public Provident Fund (PPF), Equity-Linked Saving Scheme (ELSS), National Pension System (NPS), Sukanya Samriddhi Yojana (SSY), and Unit Linked Insurance Plans (ULIPs), among others.

Can I claim tax benefits for investments made in multiple tax-saving instruments?

Yes, you can claim tax benefits for investments made in multiple tax-saving instruments as long as the total investment does not exceed the maximum limit of Rs. 1.5 lakh under Section 80C of the Income Tax Act.

What should I consider before investing in a tax saving investment?

Before investing in a tax-saving instrument, you should consider factors such as your financial goals, risk appetite, investment horizon, and tax implications. It is also advisable to consult a financial advisor to make an informed decision.

Although there are numerous investment options to save taxes, it’s vital to choose an option that offers both tax-saving and wealth-building benefits. Plus, it’s crucial to plan your taxes ahead of time, seek the most effective ways to optimize them, and fully utilize the tax exemption limit.

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