Every year, March 31st marks the end of the financial year. You will see most taxpayers rushing to invest in various tax-saving schemes during this time. Though investing in tax saver investment options is a sound way to reduce your tax liability, making tax saver investments only when the March financial year end is approaching is not prudent. The 1st of April is the beginning of a new financial year, so it is important to understand the key aspects of various tax-saver investments to make sound investment decisions and reduce your tax liability. Continue reading to learn more about the best tax-saving instruments.
For a taxpayer, investing in a tax-saver investment is crucial from a savings perspective. Tax-savings schemes offer tax deductions under Section 80C or Section 80CC of the Income Tax Act, 1961.
For instance, if your income falls in the high-income tax slab where your tax liability is charged at 30%, then investing in tax-savings schemes will help you save about Rs. 46,000 in tax. For salaried and self-employed taxpayers, April 1st is the beginning of the tax-saving season.
Many people consider investing in tax-savings schemes. However, they think a tax saver investment provides low returns with different risks across different schemes. The equity-linked savings scheme (ELSS) is the only tax saver investment available. While ELSS is a popular tax saver investment option based on your risk appetite and investment objective, it is not the only tax saver scheme available for taxpayers in India.
The best tax-saving instruments under Section 80 C of the Income Tax Act 1961 are:
Note: Please note that this list is not, in any sense, an indication or influence to particularly pursue any of these investment instruments without carefully analysing and risk analysis. They are suggestions for some of the best options available on the market. The final result (savings) depends on various factors and may vary from individual to individual and scheme to scheme. Consulting your financial advisor is advised in case of doubts.
Here are the essential facts about the tax-saving schemes mentioned in the list, you must know:
Investing in ELSS – a pure equity mutual fund with a three-year lock-in period, helps you get tax deductions up to a maximum of Rs. 1.5 lakhs under Section 80C of the IT Act. Gains on the sale of ELSS are considered long-term capital gains (LTCG) taxable at 10%. However, LTCG up to Rs. 1 lakh is exempt in a financial year.
PPF is an initiative of the Government of India with guaranteed returns and minimal risk. The current PPF interest rate is 7.1%, which gets compounded annually. On the amount deposited in the PPF account, you can claim a maximum deduction of Rs. 1.5 lakhs under Section 80C of the IT Act.
Also, PPF falls under the Exempt, Exempt, Exempt (EEE) category, implying the amount invested, accumulated interest earned, and the amount received on maturity/withdrawal would be tax-free. The PPF tenure is 15 years, which can be further extended by a block of 5 years post completion of the 15 years.
A salaried individual can claim an EPF deduction up to a maximum of Rs. 1.5 lakh under Section 80C. The EPF scheme helps you save tax apart from building a tax-free corpus as the interest earned on EPF is tax-free.
The NSC, with a lock-in period of five years, is also a government-backed tax saver instrument with guaranteed returns. The NSC is made available at designated post offices in the country with a minimum investment of Rs. 1000.
For 2022, the NSC rate of interest is 6.80% compounded annually, making it a good small savings investment scheme. By investing in NSC, you can enjoy the benefits of tax savings and accrued interest under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakhs during a financial year.
The NPS is another prudent tax-saving instrument initiated by the Central Government to provide pension benefits to all citizens of India. NPS has a lock-in period of three years and its returns are market-linked, so there is a certain risk element. Under Sectio 80C, like other tax saver instruments, you can claim tax benefits up to Rs. 1.5 lakhs.
After three years, you can withdraw up to 25% of your NPS contribution with three available withdrawals. The scheme is mandatory for Central Government employees and some State Government employees. Private sector employees can select between EPF and NPS.
SSY is a unique tax saver scheme of the Government of India meant for parents to build a corpus for managing higher education and the marriage of a girl child (if needed). Investments under SSY are eligible for an 80C deduction up to Rs. 1.5 lakh in a fiscal year.
The parents or a legal guardian of the child aged 10 years or below can open an SSY account at any post office undertaking savings schemes or an authorised commercial bank, the minimum investment being Rs.250.
The SSY tax savings scheme, with a current interest rate of 7.6% compounded annually, is available for 21 years from the account opening date. In exceptional cases, the scheme can be closed prematurely after 5 years.
Any premium paid on life insurance for self/spouse/children is eligible for tax deduction up to Rs. 1.5 lakhs under Section 80C. Life insurance is a good protection and savings tool, with tax benefits also available on maturity amounts received subject to existing tax laws.
FD with banks is another good tax saver investment alternative. You get a tax deduction up to ₹1.5 lakhs under section 80C for FD investment made in a financial year.
Other key tax saver schemes and avenues in the Income Tax Act of 1961 are:
After checking out the various tax saver schemes, you must invest in tax saver investment. While looking for a tax saver investment, consider one that gives both tax exemption and tax-free income benefits.
1. What is Section 80C of the Income Tax Act, 1961?
Section 80C of the Income Tax Act, 1961, allows tax deductions up to Rs. 1.5 lakhs in a fiscal year for investments made in key tax-savings schemes. These include PPF, NSC, LIC premium, ELSS, and so on.
2. What is the Tax Saver Scheme?
A tax-savings scheme helps earn a fixed investment scheme entailing regular deposits and earning interest on these deposits.
3. Does the ELSS scheme have a lock-in period?
Yes, the ELSS scheme has a lock-in period of 3 years.