Effective tax planning must be an important part of everyone’s personal financial plan. It will help save a lot of money which in turn will impact overall wealth creation. Usually investors keep their tax planning project for the last moment of the financial year and therefore end up investing unnecessarily due to lack of a prudent investment plan.
Investing in effective tax saving instruments can aid in meeting one’s financial goals. We have multiple tax saving instruments available in India for individuals to choose from according to their needs. The best tax saving investment options are as below:
- PPF and VPF
- Sukanya Samriddhi Yojana
- Senior Citizen’s Savings Scheme
- Bank FDs
- Insurance Policies
Let’s look at each of the tax saving investments in detail which can work as tax savings tips for individuals.
ELSS (Tax Saving Mutual Funds)
Funds which enable investors to avail tax rebates under Section 80-C of the Income Tax Act are called Equity Linked Savings Schemes (ELSS). ELSS is at the top of all tax saving instruments considering its great returns and performance in the last 3 years.
This tax saving option has give 18% compounded returns in the last 5 years. The year 2017 has seen amazing performance of ELSS as the average ELSS rose to 36%. The mandatory lock in period is only 3 years which is shortest among the tax saving investments under 80C. Investors who invest in ELSS usually qualify for tax exemptions up to Rs. 1.5 Lakhs.
NPS (New Pension Scheme)
NPS is a great tax saving option if one is looking for a retirement scheme. NPS investment is not only for tax saving but also for securing one’s future. Investors investing in NPS are eligible for tax rebates under section 80-CCE and 80-CCD (B). One can qualify for tax exemptions up to Rs. 1.5 Lakhs and in case the Rs. 1.5 Lakhs limit is exhausted an additional of Rs. 50,000 can be saved. NPS is a user friendly scheme with low cost features and high flexibility. To generate great returns in NPS a balanced investment of equity funds, corporate bonds and Gilt funds is beneficial.
ULIP (Unit Linked Insurance Plans)
ULIP is a good long term investment option and provides good returns if one invests in them for 10-12 years. ULIPs provide tax benefits under section 80 CCC as they provide insurance on investments. In ULIP the premium is mainly invested in equity and debt market. ULIPs are popular for their low costs. The new aggressive ULIPs have generated around 12% annualised returns in the past five years. In ULIP one can switch the corpus from debt to equity and then back to debt.
PPF and VPF (Public Provident Fund and Voluntary Provident Fund)
PPF (Public Provident Fund) is one of the preferred tax saving options for salaried employees which actually serves as retirement fund for investors. The investment in the PPF is eligible for deduction under the Section 80-C. Investment in PPF is linked to the salary of an individual.
However, the amount can be increased by opting for VPF (Voluntary Provident Fund) which has same tax benefits as PPF. PPF is backed by Government of India and it the safest option of all tax saving instruments with most minimal risk and guaranteed returns. The lock in period for PPF is 15 years which can be extended in blocks of 5 years. Investments can be in the range of Rs. 500 – Rs. 1.5 Lakhs during one financial year.
Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana is a good tax saving investment option if one has a daughter below the age of 10. It offers a high interest rate of 8.5% and qualifies for the same benefits of PPF. In fact it is a better alternative to PPF. The accounts can be opened in any post office or banks with a minimum deposit of Rs. 1000. The annual cap for investment is Rs. 1.5 Lakhs. A parent can open SSY for 2 daughters however the combined investment cannot exceed Rs. 1.5 Lakhs.
Senior Citizen’s Savings Scheme
This is the best option for individuals looking for a regular income in the retirement years as it offers interest rate of 8.5%. It is a 5 year scheme which can be extended up to 3 years. The investment limit per individual is Rs. 15 Lakh. For defence personnel there is no age limit for investing whereas others have an age bar of minimum 60 years.
NSC (National Saving Certificates)
NSC is fixed deposit with the Post Office. It offers lower interest rate compared to Bank FD but it is considered one of the best tax saving instruments as it is backed by the government of India. The lock in period is in the range of 5 – 10 years and NSC offers tax benefits under section 80-C. No premature withdrawal is possible in this scheme.
The bank FDs offer an interest rate in the range of 7 – 7.5 %. The interest from Bank FDs is fully taxable and is added to the income of the individual. Investors interested in low risk investing usually opt for this option.
Life insurance or health insurance policies are not only for tax savings but majorly serve the purpose of securing one’s future. Life insurance policies offer tax benefit under section 80-C. In case of death, the sum offered to the beneficiary is completely tax free. Health insurance plans offer tax benefit under section 80-D.
These are best tax saving instruments which investors can take into account before investing. If you plan your investments wisely, you can put your hard earned money to good use.
What are your plans to save tax?