KNOWLEDGE CENTRE Tax Planning / What Are The Different Types Of Tax-Saving Investment Options?

What Are The Different Types Of Tax-Saving Investment Options?

The financial year is almost at its end. There are several options to reduce your tax liability. Some important parameters that you must consider while evaluating the different options include security, costs, transparency, liquidity, and ease of investing. All these are equally important and you must make your choice as per your personal preference.

You may consider ease of investing as the most important factor because you may not have too much time. Instruments like fixed deposits (FDs) are then a suitable option. However, if you are in the highest tax bracket, the returns on FDs are about 5 percent. You may consider traditional insurance plans; however, you need to pay the premium for several years and wait until maturity to enjoy the benefits.

With a little time and research, you may find several other tax-saving investments that offer higher returns. Here are five options you may consider:

1. National Pension System (NPS)

This is a good option if you are willing to stay invested until retirement. You contribute to your NPS tier I account, which is a non-withdrawal account. You may opt for the auto or the active mode. Your contribution is invested in various securities such as equity, corporate bonds, and government securities. When you reach 60 years, you are able to withdraw 60 percent of the accumulated corpus and convert the balance to an annuity.

Tax Benefits Offered By NPS

Tax deductions of up to 10 percent of your basic salary plus dearness allowance of INR 1.5 lakh are available. An additional INR 50,000 deduction is available from the financial year 2015 – 16. The 60 percent amount is taxable as per your income slab on maturity.

2. Unit-Linked Insurance Plans (ULIPs)

The premium paid on ULIPs may be invested in debt, equity, or money market instruments. You may choose the proportion of the different asset classes as per your preference. Additionally, you may opt for inter-fund transfers without any tax liability. However, the minimum lock-in period for ULIPs is five years.

Tax Benefits Offered By ULIPs

When the premium is less than 10 percent of the sum assured, you are eligible for tax deductions of up to INR 1.5 lakh under section 80C of the Income Tax (IT) Act. Additionally, death benefits are completely tax-free in the hands of your beneficiaries. Furthermore, maturity benefits earned from ULIPs are tax-free under section 10(10D) of the IT Act.

3. Public Provident Fund (PPF)

PPF is one of the most popular tax-saving investments in India. Your investment will be locked-in for a period of 15 years. The minimum annual contribution is INR 500 with the maximum being capped at INR 1.5 lakh. You may liquidate the corpus through a loan or partial withdrawal based on certain terms and conditions.

Tax Benefits Offered By PPFs

Your investment of up to INR 1.5 lakh is exempt from taxes under section 80C of the IT Act. Furthermore, the interest and maturity amount is tax-free. However, you need to declare that you have withdrawn from your PPF account while filing the returns.

4. National Savings Certificate (NSC)

NSC is a safe investment option that offers guaranteed return on your capital. You may acquire the certificate for your desired amount. The maturity period is either five or ten years with annual interest calculation. However, this interest is reinvested in the NSC and you receive it as the total maturity benefit.

Tax Benefits Offered By NSCs

Your investments in the NSC are eligible for tax benefits under section 80C of the IT Act. Furthermore, the interest earned in all years except the last year before maturity is also tax-free.

5. Equity – Linked Savings Schemes (ELSS)

ELSS schemes deliver excellent returns, which makes these very popular tax saving investment. During the last three years, funds have earned returns exceeding 17 percent and almost 19 percent. Such schemes are transparent and liquid with no entry load. Additionally, the annual charges are nominal making these schemes cost-efficient. To maximize your returns, it is recommended you start with a systematic investment plan (SIP).

Tax Benefits Offered By ELSS Funds

An investment of up to INR 1.5 lakh per annum under section 80C of the IT Act is eligible for tax benefits. Furthermore, returns earned on your investments are also tax-free at the end of the lock-in period. For SIPs, redemptions based on first-in-first-out after a period of three years are eligible for tax benefits.

ELSS plans are offered by several fund houses. Therefore, it is important you research and analyze the different products to choose the best tax-saving mutual fund. The best performing funds display the capabilities of generating higher income that exceeds the inflation rate during a longer period of time.

You should also check out our Angel Bee mobile app. It suggest you mutual funds personalized according to your investment needs.

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