Guide to Tax-Saving Investments Avenues

The government offers several ways to legally reduce your liability and save taxes. There are various tax-saving avenues where you may invest your money to reduce your tax liability.

You have two options to save taxes; the first is tax deduction and the second is tax exemption.

In this article, we have discussed the various tax-deduction investment options that are available. The most popular with multiple investment options is Section 80C of the Income Tax Act, 1961.

Best tax-saving investments under Section 80C

Section 80C offers multiple tax-saving investments that can be categorized as government-backed and non-government schemes. The former offers fixed returns guaranteed by the government.

Although the latter types of investments do not offer fixed returns, these are also good options to consider.

Let us now look at seven government-backed investments.

Employee Provident Fund (EPF)

Your employer also contributes to the EPF to help you save for your retirement; however, this contribution is a part of your overall cost to the company (CTC).

The minimum contribution is INR 1800 per month and the maximum is capped at 12% of the basic salary plus the dearness allowance (DA).

Generally, EPF contribution is mandatory if your salary is less than INR 15000 per month. The primary goal of EPF is retirement; however, you can prematurely withdraw the amount under certain conditions. The rate of interest is changed every quarter.

EPF is an exempt-exempt-exempt scheme—the contribution, interest, and maturity amounts are all tax-exempt—(EEE).

Our EPF calculator will help you determine the amount of money generated by your EPF and how much you can expect to get at retirement.

Voluntary Provident Fund (VPF)

If your company does not contribute to the EPF or if you want to save more for your retirement, you may opt for this tax-saving option.

Since it is voluntary, there is no minimum and maximum contribution limit. Any salaried individual can invest in VPF that has a lock-in period of five years. The rate of interest is the same as EPF and modified quarterly.

It is also EEE; however, if you withdraw before five years, the amount is taxable.

Public Provident Fund (PPF)

PPF can be opened by any individual with a minimum annual contribution of INR 500 and the maximum capped at INR 1.50 lakhs.

PPF has a lock-in period of 15 years. However, you can partially withdraw some amount based on certain conditions or to avail of a loan against the PPF corpus.

This is also an EEE scheme, which means the investment, interest, and maturity benefits are tax-exempt. The interest is declared by the government and modified quarterly.

Sukanya Samriddhi Scheme (SSS)

This tax-saving scheme is for girls aged below 10 years. Parents or guardians can contribute a minimum of INR 250 and a maximum of INR 1.50 lakhs per year in this scheme.

50% of the money can be withdrawn once the girl child attains the age of 18 years and the balance can be withdrawn on reaching 21 years. This scheme is also EEE with a quarterly updated rate of interest.

National Savings Certificate (NSC)

NSC is one of the most popular tax savings schemes in the post office. You can invest as little as INR 100 with no cap on the maximum contribution.

NSC is available only for Indian residents and has a five-year lock-in period. Compared to the PF schemes, the rate of interest offered by NSC is slightly lower but is also revised quarterly.

However, one limitation of the NSC is that the interest earnings are taxable.

Five-year Post Office Fixed Deposits (FDs)

FDs are a popular investment choice among Indians. The five-year post office FDs can be opened by any resident Indian with no minimum or maximum contribution limits.

The lock-in period is five years; however, under certain conditions, premature withdrawal is allowed. The interest is modified quarterly and is taxable each year at your prevalent income tax slab rate.

Senior Citizens Savings Scheme (SCSS)

The last government-backed 80C investment option is for senior citizens aged 60 years and above. The minimum and maximum contributions are INR 1000 and INR 15 lakh, respectively; however, the tax deduction is available only for investments up to INR 1.5 lakh.

The SCSS comes with a lock-in period of five years, which can be extended in blocks of three years. Premature withdrawal based on certain conditions after one year from the date of opening the account is allowed.

The interest can change quarterly, and the entire interest earned is taxed at your current slab rate.

Let us now look at six non-government backed tax-saving investments under 80C.

Bank Fixed Deposits FDs

Bank FDs are popular and come with different tenures ranging from seven days to some years.

However, tax-saving FDs have a lock-in period of five years. The contribution limits vary from one bank to another.

Moreover, the rate of interest is slightly higher than the bank savings account and these earnings are taxable at your income tax slab rate.

Insurance policies

Insurance policies can be of different types like term plans, endowment policies, and much more.

Any Indian resident can buy an insurance policy and the premium depends on the type of plan, your age, and other factors.

The duration and earnings also vary based on the type of policy. Understanding the terms and conditions before investing is important.

Equity-Linked Savings Scheme (ELSS)

ELSS is a type of mutual fund scheme that invests the corpus in shares, stocks, and equities.

The minimum contribution can vary based on the chosen scheme and the fund house. The lock-in period is three years, which is the lowest for section 80C investments.

However, the returns depend on the performance of the scheme and are subject to market conditions.

National Pension System (NPS)

It provides several tax benefits and any Indian aged between 18 and 60 years can open an NPS account.

The minimum contribution is INR 1000 with no cap on the maximum amount. The NPS investment is locked until your retirement and premature withdrawal is subject to certain conditions.

The returns depend on your chosen asset allocation between equity, debt, and balanced funds. Since a part of the NPS investment goes to equities, the returns are not guaranteed.

Apart from the 1.50 lakhs deduction, an additional deduction of INR 50000 is available under section 80CCD (1B).

Moreover, employer contributions of up to 10% of your basic salary plus DA are eligible for tax deductions under section 80CCD (2).

Unit-Linked Insurance Plans (ULIPs)

ULIPs combine insurance and investment wherein some portion of the premium is used for life cover and the remaining is invested in different asset classes.

There is no limit on the contributions and the money is locked in for five years. The returns are not fixed and are linked to market performance.

Infrastructure bonds

Investments of up to INR 20,000 in these bonds are tax-exempt under section 80CCF.

These have a five-year lock-in period with a tenure of up to 10 years. However, the entire interest earned on these bonds is taxable.

Payment applicable for tax-saving deduction under section 80C

The principal repaid on your home loan is also eligible for tax benefits under section 80C.

Additionally, the deduction is available for stamp duty, transfer fees, and registration charges paid while purchasing a home.

How to plan for tax-saving investments

The various tax-saving investment options when used smartly can provide several benefits and align with your financial goals. However, you should consider your financial situation and investible surplus before putting money in one or more eligible tax saving investment schemes.

Expenses that can be claimed as deductions under section 80C

Individuals can also claim tax deductions on tuition fees paid for two children. The exemption is limited only to the fees and excludes coaching expenses, capitation fees, and other costs.

How much tax can be saved under section 80C?

Several investments offer income tax deductions under this section. However, investments of only INR 1.50 lakhs per year are eligible for the tax benefits.

Frequently Asked Questions (FAQs)

What is section 80C under Chapter VI A?

The Income Tax Department offers tax benefits if you invest in certain schemes or incur eligible expenses under Chapter VIA. Section 80C includes investment options like PPF, SCSS, SSS, infrastructure bonds, ULIP, ELSS, and much more.

Can you claim benefits exceeding INR 1.50 lakhs if you invest in different options?

No, the maximum deduction is capped at INR 1.50 lakhs and includes your investments across all eligible options.