Tax Saving Investments is a versatile part of everyone’s life as they provide tax deductions under section 80C or 80CCC. Due to the importance of these investments, individuals often desire to invest. Although, they are not eager enough to invest because of low returns and high risks related to the investments. Also, it’s mandatory to have a good understanding of how to save income tax. Well, there are many tax saving options that are available today. So let’s take a look at the best tax-saving schemes of 2020.
While selecting the right tax-saving investment options it’s necessary to consider the factors like safety, returns, and liquidity. One should also know how the returns will be taxed. If the returns on investment are taxable, then the scope to make wealth over the long-run gets limited. But there are various smart ways to save taxes and enjoy the highest savings possible. Although, for many people, tax-planning is a let’s doing it later thing.
Tax Saving Investments
The tax-saving season starts from the 1st of April for both salaried and non-salaried taxpayers. The smart investor will always look for tax-saving investments that not only offer tax exemption benefits but also help to earn tax-free income. Besides this, a smarter way is to start investing in the early quarters of the financial year. Thus, this will give you more time to plan your investment and can avail the highest returns on investment from various tax-saving investments.
Before moving on to the list of best tax-saving investment options, it’s necessary to know about the key section of the Online Income Tax Act i.e. section 80C. Most forms of the tax-saving investments scheme work according to the parameters of section 80C of the Income Tax Act. As per this section, the investments done by the investor are eligible for tax exemption up to a maximum limit of Rs.1, 50,000.
Such investments involve ELSS (Equity Linked Saving Scheme), Fixed Deposits, Life Insurance, Public Provident Fund, National Savings Scheme, and Bonds. There are very few investment options that give an additional tax deduction, over and above this limit.
Best Tax-Saving Investment Options Under Section 80C
However, there are many tax-saving investment schemes available in the market. People may get confused about which option best suits them. In order to make you select the best investment option based on your risk appetite and preferences. Here are some of the best tax-saving options under Section 80C of the Income Tax Act, 1961.
| Investment | Returns | Lock-in Period |
|---|---|---|
| ELSS Fund | 15%-18% | 3 years |
| National Pension Scheme (NPS) | 12%-14% | Till Retirement |
| Unit Linked Insurance Plan (ULIP) | Returns vary from plan to plan | 5 years |
| Public Provident Fund (PPF) | 7%-8% | 15 years |
| Sukanya Samriddhi Yojana | 8.5% | N/A |
| National Savings Certificate | 7%-8% | 5 years |
| Senior Citizen Saving Scheme | 8.7% | 5 years |
| Bank FDs | 6%-7% | 5 years |
| Insurance | Returns vary from plan to plan | 3 years |
ELSS (Equity-Linked Saving Scheme) Mutual Fund
The equity-linked saving scheme is a mixed mutual fund scheme that has two different features. Firstly, the investment amount in this scheme is eligible for tax exemption up to the maximum limit of Rs.1.5 Lakh under section 80C of the Income Tax Act. Secondly, the investment done in ELSS has a lock-in period of 3 years. This type of mutual fund provides an interest rate of 15%-18%.
However, the returns are not secured in this scheme and change as per the market performance of the fund. The investors can choose dividend or growth option in ELSS fund as per one’s own requirement. Although, from the 1st April 2018, the dividends in an equity scheme are 10% taxable. Therefore, the investors who select the growth option over dividend are probably to generate tax-effective returns.
In order to reduce the risk and gain long-term capital returns, the investors will diversify the investment in more than one ELSS scheme on the basis of the industry exposure and market capitalization. This tax-saving investment option provides flexibility and liquidity in investment. This also offers a high return on investment over a long period with the tax-exemption benefits. Apart from this, ELSS investment also gives transparency and ease of investment.
National Pension Scheme (NPS)
As one of the best tax-saving options, the National Pension Scheme assist to offer tax-exemption under 3 different sections as mentioned below:
- The contribution up to the highest limit of Rs.1.5 Lakh can be claimed for tax exemption under section 80C of the IT Act.
- Under Section 80CCD (1b) one will get an extra deduction up to Rs.50,000.
- If 10% of the basic salary of the individual is contributed by the employer in NPS, then the amount isn’t taxed.
The trio of tax benefits has enhanced the recognition of NPS among investors. Although, in NPS, only 40% of the fund is tax-free at maturity time. Also, in NPS it’s necessary to invest 40% of the corpus in the annuity plan to get monthly income. The annuity paid to the investors after retirement is considered as income and is completely taxable.
Besides this, one cannot do any withdrawals in NPS before retirement, except in some specific circumstances. Also, the national pension scheme offers the flexibility to pick between Auto and Active options for distribution. If the subscriber chooses the option of active choice, then they’ll require to mention the percentage distribution between equity, gilt and corporate. Although, it should be remembered that the highest investment that one can make into equity is 50%.
Moreover, the NPS offers safety and transparency in investment. The costs of investment in NPS are quite low. One can start doing investment in a national pension scheme with a minimum amount of Rs.1000 and can see their investments grow in an effective manner.
Unit Linked Insurance Plan (ULIP)
ULIPs are tax-saving investments that not only offer tax exemption benefits to the investors but also help them to achieve high returns on investment over a long-term period. The new-age ULIPs launched by the insurance companies come with zero premium allocation charges and zero administration charges, which results in better returns to the investors.
Furthermore, ULIP plans have a lock-in period of 5 years and provide the investors with ease of investment. Even the investors have the flexibility of investment. As they can select from the many fund options to invest in. Also, in ULIP, one can make a free switch between funds 3-4 times during a year. Although ULIP is an attractive option for tax-saving investment, the returns on ULIPs are fully based on the market performance of the fund.
Public Provident Fund (PPF)
PPF is a famous long-term tax saving option that includes the feature of tax-saving investments. The interest rate on the PPF balance is reset on a quarterly basis. In case of the implication of income tax, the PPF enjoys an EEE status i.e. exempt, exempt, and exempt. This implies that the contribution made towards the PPF account, the interest obtained and maturity proceeds are all tax exempted. Therefore, it is one of the best tax-saving investment products. While the rate of interest on PPF keeps on changing the chances of risk remain stable.
Moreover, PPF has a maturity period of 15 years that will be later extended for 5 years. A maximum of Rs.1.5 lakh can be claimed for tax exemption under section 80C of the Income Tax Act. It is the safest and ideal financial asset that provides high returns on investment over a long-term period. In the PPF account, Partial withdrawals are allowed every year, after the completion of 7 financial years from the date of initiation. One can do a partial withdrawal, given the withdrawal amount must not exceed 50% of the balance. During a financial year, a person can only make one withdrawal.
Also, PPF provides ease of investment as one can start investing in a PPF account with a minimum amount of Rs.500 and can contribute up to a maximum limit of Rs.1.5 lakh in a year. Moreover, the investors have the option to contribute either in monthly installments or a lump-sum amount. Although, the highest contribution of 12 installments is allowed during a year.
Sukanya Samriddhi Yojana
This is a small deposit plan especially designed for the girl child. The plan is launched as a part of the ‘Beti Bachao Beti Padhao’ campaign. The Plan currently provides an interest rate of 8.1% and offers tax exemption benefits. The tax benefits provided under SSY are:
- The investments done in SSY are eligible for tax exemption up to the maximum limit of Rs.1.5 lakh under section 80C of the IT Act.
- Also, the interest accrues against the SSY account gets compounded annually and is eligible for tax exemption.
- The maturity proceeds and withdrawal amount are also tax-free.
In addition, one can enroll for a Sukanya Samriddhi Yojana after the birth of a girl child until she turns 10. The scheme remains working for 21 years from the date of opening the account till the girl gets married after she turns 18 years old. At present, SSY provides the maximum tax-free return of 8.5%.
Moreover, the cost of the investment is so affordable as one can make a minimum investment of Rs.250 (this amount of earlier Rs.1000) and may invest up to a maximum Rs.1.5 lakh during a financial year. As the best tax saving investment scheme, the plan makes sure the security of investment and secures the future of the girl child.
National Savings Certificate
This is a fixed income tax saving investment option that can be opened with any post-office. NSC ensures the safety of investment because it is a government-initiated savings scheme. The plan is specifically designed to encourage mid-income investors to do investment with the advantage of taxability of income. NSC is a low-risk tax saving investment scheme that provides a guaranteed return on investment. The tax benefits provided under the policy are:
- One can claim tax deduction up to the highest limit of Rs.1.5 lakh under Section 80C of the IT Act.
- The interest obtained on NSC is added back to the initial investments and is eligible for tax exemption.
- During the 2nd year of investment in the NSC account, the investors can claim a tax deduction on investment of that year, and the interest obtained during the previous year. As the interest obtained is added to the investment and is compounded annually.
Moreover, on the maturity of this tax-saving investments option, the individual will receive the total maturity amount. Since no TDS is applicable on NSC payouts; the investors are needed to pay the applicable tax on it.
Senior Citizen Saving Scheme
The Senior Citizen Savings Scheme is particularly designed to offer financial safety to senior citizens. Individuals above 60 years have eligibility to invest in SCSS. According to this scheme, the investors can make a one-time deposit of a minimum of Rs.1000 and can invest up to a maximum of Rs.15 lakh (in case of joint holding) and Rs.9 lakh (in case of single holding). Therefore, the cost of investment in SCSS is quite flexible.
Furthermore, SCSS has a lock-in period of 5 years. In this scheme, the interests are payable on a quarterly basis. Under this tax saving scheme, the deduction of up to Rs.1.5 lakhs is applicable for TDS as per section 80 C of the Income Tax Act. This scheme provides the maximum interest rate of 8.7% per year and ensures a guaranteed return to the investors. Also, the scheme allows premature withdrawal in case of any financial emergencies.
Bank Fixed Deposit Scheme
Bank FDs are security deposits that offer guaranteed return investment options. The tenure of Bank FDs is for 5 years. The bank FD provides tax-free income. This plan is best suitable for people who have a low-risk appetite and desire to save money for a long period. Bank FD gives guaranteed return on investment to the individuals and also make sure the safety of the investment. As the amount invested gets locked-in up to the complete tenure.
In FD, one can claim up to the maximum limit of Rs.1.5 lakh under section 80C of the Income Tax Act. The banks set the interest rate of the fixed deposit scheme that can be changed quarterly or every financial year. Also, Bank FD has greater interest-earning potential in comparison to the savings account and allows only one-time lump-sum payment. Because Bank FD doesn’t allow premature withdrawal.
Insurance
Life Insurance is one of the tax-saving investment products available in the market. Although, it is not recommendable to individuals to buy an insurance plan only with the motive of saving tax. Because the primary goal of these insurance policies is to offer insurance coverage.
In addition, one may also avail benefit on the taxability of income under section 80C and 10(10D) of the Income Tax Act. In an insurance plan, the premium paid and maturity proceeds toward the policy are tax-free. Moreover, the returns provided under the policy like endowment or money-back are also tax-free. Under a life insurance scheme, one can claim tax exemption up to the maximum limit of Rs.1.5 lakh.
How to plan the Tax Savings Investments?
Although, most of the taxpayers delay tax planning till the last quarter that ends up with hassled decisions. The perfect time to plan the tax-saving investments is at the start of the financial year. If a person starts planning for tax-saving investment schemes at the start of the financial year, then the investments made can multiply over a long period and may help the individual to fulfill their long-term financial goals. The tax-payers can follow these tips to plan the tax saving for the year and make a wise decision while investing in tax-saving investment plans. There are also some long term investment options that can help you in tax-saving. Click here to know more about them.
- Check your tax-saving expenses that pre-exist like insurance premiums, the contribution made towards the EPF account, children’s tuition fees, loan repayment, etc.
- If your tax-saving expenses cover the maximum limit of Rs.1.5 lakh then you may not require investing the complete amount.
- Based on the goal and risk portfolio, select the tax-saving investments like PPF, ELSS funds, Bank FDs, and NPS.
Additional Tax-saving Investments Beyond Section 80C
Apart from tax deduction under section 80C, there are many tax-saving investment schemes, that help to save income taxes.
- One will gain tax benefits on the premium paid towards a health coverage plan and home loan interest.
- A person will claim a deduction up to Rs.25,000 on the premium paid towards health insurance policy under section 80D of the Income Tax Act.
- Under Section 80EE of the Income Tax Act, one will claim a deduction up to Rs.50,000 on home loan interest.
- The home loan also assists in minimizing taxable income. As the principal amount of the home loan is often claimed under section 80C up to Rs.1.5 lakh and the interest amount are claimed as a deduction from income from house property.
FAQs Regarding Tax Savings Investments
One can minimize his taxes legally by making investments in the government-approved tax-free investment schemes.
One can invest a maximum limit of Rs.1.5 lakh under the section of the Income Tax Act, 1961. As in most of the investment plans, one can only get the benefit of tax exemption up to Rs.1.5 lakh.
One can save income taxes by doing investments in tax-free investment options. So one will be able to pay less tax on higher income.
Editor’s Note | Tax Saving Investments
COVID-19 has a deep impact on businesses as well as individuals. Everyone was locked down at home. During such a tough time, completing compliance on time seems challenging for most of us. The government has extended the deadline for making investments till 30th June 2020 to allow taxpayers some leeway towards saving the taxes for the financial year 2019-20.
