Best Tax Saving Options In India6 min readReading Time: 5 minutes
Investing in tax saving instruments is a great way to avail tax benefits and accumulate wealth for your financial goals. Choosing an appropriate instrument from the Section 80C basket of the Income Tax Act may seem like a daunting task, however, it is anything but.
Let’s have a look at some of the best tax saving options that you could opt for.
Equity Linked Savings Scheme (ELSS)
ELSS Funds are mutual fund schemes that invest in stocks of companies of different sizes that are present across different sectors. ELSS Funds offer you relatively higher returns that enable you to grow a larger corpus for your long term goals. These funds have a lock-in period of 3 years which is the shortest among all the other tax-saving options. However, you may want to stay invested even post the expiry of the lock-in period to realise the full return potential of the fund.
You can invest in ELSS funds conveniently via monthly SIPs of as low as Rs 100. This way you get the benefit of compounding of returns and a decrease in your overall cost of investment via rupee cost averaging. You are eligible to claim a tax deduction of up to Rs 1.5 lakh for the investments made in these funds. Your long term capital gains in ELSS funds are exempt from tax up to Rs 1 lakh. The capital gains above that limit are taxed at the rate of 10%.
Before you make a move, remember that ELSS Fund returns are market-linked. It means that the fund performance may vary from one period to another. So, you would have to be an aggressive investor with a high-risk tolerance to invest in these funds. Also, all the ELSS Funds may not be the same. You may compare the portfolios of competitive funds to invest in one that fits your risk profile.
Sukanya Samriddhi Yojana (SSY)
SSY is a proactive way to save for your daughter’s education and marriage. Currently, you can earn an interest of 8.4% on your investments that is calculated on a yearly basis. However, the interest rates are revised by the government on a quarterly basis and are subject to change. You can open an account in any post office or designated banks in the name of your daughter up to the age of 10 years with a minimum investment of Rs 250.
Post that, you can make deposits in multiples of Rs 50. However, your investment in a financial year cannot exceed Rs 1.5lakh. You are allowed to open a maximum of two accounts in the name of two different girl children. You may continue to invest in the account for a period of fifteen years from the date on which you opened the account. Your investments of up to Rs 1.5 lakh are tax-deductible under Section 80C. Also, the interest earned on the account is completely tax-free.
You can make partial withdrawal up to 50% of the account balance when your daughter turns 18 and may even close the account when she turns 21.
Employee Provident Fund (EPF)
EPF acts as a social security scheme for individuals who are working in the organised sector and earning an income by way of a salary. It is a long term investment tool that you can utilise to avail tax benefits as well as to accumulate wealth for your future. It provides protection of invested capital and you also get guaranteed returns on your investment. Each month a part of your salary (12% of basic salary + DA) gets deducted and your employer deposits it in the EPF.
EPF account enjoys a EEE status. Your contributions to the EPF account are tax-deductible up to Rs 1.5 lakh from your taxable income under Section 80C. In addition to this, the interest earned on your contributions is completely tax-free. You are allowed to withdraw from your EPF account after the expiry of a lock-in period of 5 years. Such withdrawals are also exempt from tax.
National Pension System (NPS)
It is a smart pension scheme that allows you to save up for your retirement and also reduce your tax liability to a large extent. Under this, you can contribute in a systematic way to build a retirement corpus for your future. Also, you get to secure a regular income for your post-retirement life. You can start investments in NPS with amounts of as low as Rs 1000. This way it doesn’t hurt your pocket and keeps you committed to your goal.
NPS offers you Tier 1 and Tier 2 accounts. It is mandatory to invest in Tier 1 account while a Tier 2 account acts as an add-on voluntary savings facility. Investments in Tier 1 accounts are tax-deductible up to Rs 1.5 lakh under Section Section 80 CCD (1). But this is available within the ceiling of Section 80 CCE. Besides, you can claim additional tax saving of Rs.50,000 under section 80 CCD (1B). Thus, NPS lets you enjoy tax benefits to the tune of Rs 2 lakh.
You can choose a fund manager from amongst the seven Pension Fund Managers that are enlisted by the Pension Fund Regulatory and Development Authority of India (PFRDA). Upon retirement, you can withdraw up to 60% of the accumulated corpus and it is completely tax-free. With the rest of the amount, you need to purchase a pension plan to get a pension thereafter.
Public Provident Fund (PPF)
It is one of the best ways to save tax and accumulate wealth for your post-retirement life. At present, your investments can earn an interest of 8.4% that is calculated annually. However, the interest rates are subject to change and are revised by the government every quarter. You can open a PPF account with a minimum deposit of Rs 500 in any post office. Once your account is opened, you may continue your contributions in the multiples of Rs 50.
You can invest a minimum amount of Rs 500 every year and keep your PPF account active. But your overall investment in a particular financial year cannot be more than Rs 1.5 lakh. You can stay invested for a period of up to 15 years and the same can be extended for an additional five years. With PPF, you are eligible to claim a tax deduction of up to Rs 1.5 lakh from your taxable income under Section 80C. In addition to this, the interest earned on your deposit doesn’t attract any tax.
You are allowed to close the account prematurely only on certain occasions like for treatment of a life-threatening disease, higher education of self/dependent children and due to change in your resident status. However, you can avail of such a facility only upon completion of 5 years from the date of joining and 1% interest would be deducted from your account.
Saving tax is indeed an indispensable and important part of earning money. However, you need to perceive it in a holistic manner without restricting your efforts only to tax-saving. You can make this activity more comprehensive by linking your tax-saving investments to various financial goals. In addition to this, consider the lock-in period involved in each instrument and plan your investments around it.