Tax Benefit Schemes : Tax Saving Ways in India


Since the financial year is about to end and everyone would be finding ways to reduce tax payments within the legal framework. There are various options available to save taxes and make the best investments possible. Although the tax savings approach should start in the initial quarters and not be a last-minute job, like it’s said better late than never.

Only choosing an investment option with the objective to save tax is not the right thing to do when there are lots of options available that help you make the best out of the investments made. It is required to consider factors like safety, return, liquidity, lock-in period, investment objective, etc. another important factor is to understand if the returns earned on the investment will be taxed or not.

The Income Tax Act under section 80C provides the taxpayers an exemption limit up to Rs.1,50,000 if invested in schemes that meet the criteria of the section. There are various tax saving investment plans that fall under this section which help reduce tax liability. The list is as follows:

  1. Equity Linked Savings Scheme (ELSS)

ELSS is an open-ended mutual fund scheme with a diversified objective. It falls under the 80C criteria thus fulfilling the objective of tax savings and also operates like a mutual fund generating high returns. The scheme invests 80% of its assets in stocks thus being risky compared to other tax saving investment options. It has got the lowest lock-in period of 3 years amongst others. The scheme is said to generate 5%-18% return. However, the returns keep varying based on the market performance.

  1. National Pension Scheme

NPS allows working professionals and earners from the unorganised sector to benefit from a pension, post-retirement. NPS provides under 3 different sections as mentioned below:

  • 80C- tax exemption up to Rs.1,50,000
  • 80CCD(1b)- Additional deduction up to Rs.50,000
  • 10% of the basic salary of the taxpayer when contributed by the employer in the NPS, then that amount is not taxed

Any Indian between the age of 18 to 60 can open an NPS account. it generates a return of 9%-12%. The investment in NPS is locked-in till the age of 60 with withdrawals allowed under certain situations. At the time of maturity, only 40% of the corpus is tax exempted. Also, it is mandatory to invest at least 40% of the corpus in an annuity plan which is taxable.

  1. Unit Linked Insurance Plan (ULIP)

ULIP is an investment product that provides the benefit of insurance and investment in a single package. It helps investors build wealth alongside providing life insurance benefits. A part of the premium paid is kept aside for life insurance and the remaining is invested in equities, debt or combination of both. The scheme has a lock-in period of 5 years. At the time of maturity, the returns earned under ULP are tax exempted under Sec 10(10D).

  1. Public Provident Fund (PPF)

PPF is the most popular and common investment scheme to avail tax benefits under Sec 80C. The contribution made towards PPF account is exempted, the interest earned is exempted and also the maturity proceeds are exempted from tax. The interest rate is reset quarterly. PPF has a lock-in period of 15 years and can be further extended for a period of another 5 years. A minimum amount of Rs.500 is required every year to keep the account active. The maximum annual investment limit is Rs. 1,50,000.

  1. Sukanya Samriddhi Yojana (SSY)-

SSY is a small deposit scheme aimed at progressing the development of a girl child. The account can be opened after the birth of the girl child or till 10 years of age. The account remains operative for 21 years and is intended to meet the future expenses of the child. The interest rate is reset quarterly and is currently at 7.6%p.a. Just like the PPF accounts, contributions made towards an SSY account are exempted, the interest earned is exempted and also the maturity proceeds are exempted from tax.

  1. National Savings Certificate (NSC)

It is a small savings instrument which is backed by the government. The NSC account can be opened in any post office. It is a low-risk tax saving option with a guaranteed return by the government. It is basically designed to encourage mid-income investors to make investments along with the benefit of taxability. The scheme has a lock-in period of 5 years. The interest earned is reinvested and eligible for tax exemption. Since no TDS is applicable on withdrawals, the investor is required to pay a tax on it.

  1. Senior Citizen Savings Scheme

It is a government backed savings scheme specifically designed for the senior citizens to provide financial safety. Individuals above the age of 60 are eligible to open an account and invest in this scheme. It has a lock-in period of 5 years and the interest is paid quarterly. The individual is allowed to make a one-time deposit with a minimum amount of Rs.1000. The maximum investable amount is Rs.15 lakhs (in case of joint holding) and Rs. 9 lakhs (in case of single holding).

  1. Tax Saving Fixed Deposits

Tax Saving FDs are similar to Bank FDs with the only difference being the tenure. These FDs have a lock-in period of 5 years. As a tax-saving investment plan, the bank FD offers tax-free income. This is best suitable for individuals who have a low-risk appetite and want to save money over a long-term period.  The banks set the interest rate of the fixed deposit scheme which can be changed quarterly or annually. Unlike Bank FDs, tax saving FDs do not allow premature withdrawal.

  1. Insurance

Life Insurance is another common tax-saving investment product available.  in the market. Along with the benefit of insurance coverage, it also helps avail the benefit on the taxability of income under sections 80C and 10(10D). The premium paid and maturity proceeds are tax-exempted. Also, returns offered under the different policies like endowment or money-back are also tax-free. Under a life insurance policy, one can claim tax exemption up to the maximum limit of Rs. 1.5 lakh.

  1. Employee Provident Fund (EPF)

EPF is a retirement savings scheme available to all salaried employees. It is provided by the central government. The scheme requires individual to contribute 12% of your basic salary + Dearness Allowance (For companies with less than 20 employees, a 10% rate is applicable). Women employees are allowed to contribute only 8% for the first three years of their employment to help increase their monthly take-home pay. This amount is deducted monthly by the employer and deposited in the EPF along with an equal contribution from the employer. Tax benefit up to Rs. 1,50,000 can be availed every year based on the contribution made. Also, the EPF balance (including the interest earned) is tax-free if withdrawal is made after five years of continuous service.

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