Benjamin Franklin once said, “In this world, nothing is certain except death and taxes.” More and more people are now investing in instruments that can help them enhance savings. Investments play a huge role in the amount of money you can save on taxes. Therefore, it is important to plan carefully and make an informed decision rather than going for the first option available. However, the majority of the Indian population doesn’t plan their investments. Investing in tax saving instruments is largely a last minute survey and decision-making process that takes place at the end of financial year. Because of this rushed surfing of available instruments and options, people don’t read all the conditions and additional costs that can be added, and are unable to yield maximum benefits from their investments. The smarter approach to tax-free investments is investing in the early quarters of the financial year maximum tax can be saved. There is an entire variety of investment schemes available across banks today. The following are the best tax-saving options in India-
- Tax saving fixed deposit schemes- One of the oldest and best methods to invest for tax-saving purposes. Tax-saving fixed deposit schemes are similar to most other fixed deposit schemes. The interest rate varies from 8.5%-9.75% per annum, similar to other fixed depos and interest is taxable. However in this scheme, five years is the lock in period. That means investors will not be able to withdraw funds for a minimum of five years, or before the maturity of the scheme.
- Equity-linked saving schemes (ELSS) Mutual funds- An ELSS is specially designed for tax saving purposes. However these schemes are offered at high interest rates and are high risk investments. Mutual funds also offer the highest returns compared to other tax savings options, but these returns are neither fixed nor guaranteed. They help to calculate income tax deductions under Section 80C of the Income tax act. Mutual funds have a shorter lock in period of 3 years. One of the benefits of equity linked saving schemes is the Systematic Investment Plan (SIP). A SIP allows you to invest a small fixed sum every month, rather than paying a heavy sum all together. This helps to reduce the financial burden on you.
- National Pension Schemes (NPS)- The percentage of an employee’s basic salary (up to a maximum of 10%) that goes into their pension scheme is tax deductible. The limit of this deduction is a maximum of Rs. 1.5 lakhs annually. A NPS is not exactly considered a tax saving instrument, but it guarantees a steady income after retirement, in addition to implementing tax savings. The only limitation is that this investment cannot be accessed until the investor has retired.
- Public Provident Funds- A public provident fund is a long-term saving scheme issued by the Central Government. Public provident funds allow a great deal of flexibility, so individuals who invest in a PPF can draw maximum tax savings without exposing themselves to any risks. Any deduction towards your PPF account is tax deductible. The interest earned at maturity is tax-free. Banks also offer loans against PPFs, but only after five years of the tenure are completed. The lock in period for a public provident fund is 15 years, so if you are looking for a short-term tax saving option, you might not want to consider this particular scheme.
- Senior Citizen saving scheme- This scheme, as the name suggests, offers benefits and returns for Senior Citizens. While the interest on these policies is taxable, most senior citizens earn well below the taxable limit, hence it isn’t a cause for concern. The tenure for this saving scheme is 5 years, but investors are allowed to withdraw funds as long as they adhere to certain terms and conditions. A senior citizen saving scheme is one of the safer investment schemes, as the funds remain with the Indian government. Interest under this scheme is paid at the end of every financial quarter – March 31st, June 30th, September 30th and December 31st, regardless of the date on which the investor made the deposit. The minimum investment amount is Rs. 1000, while the maximum is Rs. 15,00,000.
- Health Insurance scheme- While health insurance is primarily meant to ensure the wellbeing of an individual and/or their family, most of the time an investor is not aware of the taxes that can be saved under a health insurance scheme. By providing both health cover as well as an opportunity to save tax, health insurance coverage is one of the most beneficial of tax saving schemes. The premiums paid towards a health insurance policy by an investor can be claimed for tax deduction under Section 80D of the Income Tax Act.
- Life Insurance- There are many financial goals of an individual that can be met using life insurance. Every type of insurance plans, including endowment, term, and moneyback, qualifies for tax benefits on entry and redemption. However, if you are looking for a relatively short term investment at a lower price, you should probably go for term insurance.
- Rajiv Gandhi Equity Saving Scheme (RGESS)- RGESS offers tax benefits for first-time investors who are earning up to Rs.12 lakhs per annum. 50% of the invested amount qualifies for tax reduction under section 80C. However in this option, returns are not guaranteed as the investment is made in stocks.
- Employee Provident Fund – Employers subtract 12% of their employees’ salaries for EPF purposes, and also contributes to the investment himself. This investment is eligible for tax deductions. Employees can also invest more of their income over and above the 12% that is compulsorily invested, and this excess amount also qualifies for tax deductions. It is also very easy to transfer this EPF from one job to another. All you need to do is withdraw the EPF after you leave the job.
The above mentioned schemes can help you to save taxes in the most optimized way possible. It is up to you to choose the best scheme based on your investment tenure and the features of each one of them.