1. 6 best tax-saving instruments to invest in

6 best tax-saving instruments to invest in

If you are reading this article, you are likely to be someone whose income exceeds the threshold of Rs 2.5 lakhs for paying the taxes.

By: | Updated: October 1, 2016 12:34 PM
The invested amount of tax saving fixed deposit is eligible for the tax deduction under section 80C of the Income Tax Act. The invested amount of tax saving fixed deposit is eligible for the tax deduction under section 80C of the Income Tax Act.

If you are reading this article, you are likely to be someone whose income exceeds the threshold of Rs 2.5 lakhs for paying the taxes. When it comes to tax saving, there are some legitimate ways of doing that and the best part is that most of these instruments help in enhancing your savings also. So, if you are someone who wants to start investing for the purpose of saving on taxes, read this article further to know about the best tax saving investment options that help in growing your wealth.

1. Public Provident Fund (PPF)
Public Provident Fund is no doubt the best tax saving investment option as it comes with complete tax saving option along with maximum safety. Under section 80C of the Income Tax Act, you can save tax on this investment. The interest paid on PPF accounts is tax free. It comes under EEE (exempt, exempt, exempt) regime i. e. There would not be a tax at any point, be it an investment, return or maturity. Almost every major bank offers this facility to its customers.

Other Key Features of PPF
Lock in Period: 15 Years
Investment Limit: Rs.500-Rs.1, 50,000 annually
Interest Interest rate varies with the market rate. Depends upon 10 year government bond yield.
Tax on Return: Not Taxable
Loan: After 3 Years
Premature Withdrawal: After 6 Years
Available In: Banks & Post Office

2. Employee Provident Fund (EPF)
If you are an employee in an organized sector, you must aware with this tax saving investment option. It is a compulsion for employers to deduct 12% salary of an employee towards employee provident fund (EPF). The employer also makes the same contribution and money invested in EPF is eligible for tax deduction under section 80C of the Income Tax Act. In fact, interest paid is also tax free for this investment. However, fewer people know that you can also invest more than the prescribed 12%. And, this excess amount also qualifies for tax deduction. It can easily be transferred from one job to another, and after leaving the job you can withdraw it.

Other Key Features of EPF
Lock in Period: Retirement or Resignation
Investment Limit: 24% of basic salary
Interest: EPFO determines Interest rate every year according to its return
Loan: Only in special cases
Premature Withdrawal: In special cases
Tax on Withdrawal: If withdrawn before 5 years
Equity Linked Saving Scheme (ELSS)
ELSS or Equity Linked Saving Schemes are a kind of equity-linked mutual funds. These funds come with a lock-in period of 3 years and give good returns in a longer period. You can invest up to Rs 1, 50,000 in ELSS funds either as a lump sum or on a monthly basis (SIP) thereby spreading your investments over the course of the year. Money invested in ELSS get tax deduction under section 80C of the Income Tax Act. In case, you need some money before three years then you can choose the dividend option, which is also tax-free.
Other Key Features of ELSS
Lock in Period: 3 Years
Investment Limit: You can invest any amount
Return: 10%-20% in the long-term
Investment Area: Investment in equity and equity securities

3. Tax Saving Fixed Deposit
Tax saving fixed deposit gives you fixed return as well as benefit of tax savings. It is one of the most popular tax saving options as it comes with plenty of features. Among all the fixed return tax saving investments, tax saving FD has a minimum lock- in period of 5 years. You can invest minimum Rs 100 to maximum Rs 1.5 lakh in a year. The invested amount of tax saving fixed deposit is eligible for the tax deduction under section 80C of the Income Tax Act. The interest earned from the tax saving FD is taxable. If you have a joint tax saving FD account, the tax benefit is available only to the first account holder.

Other Key Features of Tax Saving FD
Lock in Period: 5 Years
Investment Limit: Maximum Rs.1, 50,000 annually
Return: Depends upon bank
Tax on Return: Taxable
Loan: No
Premature Withdrawal: No
Available In: Banks & Post Office

4. National Saving Certificates (NSC)
National Saving Certificate are very similar to Tax Saving FD with only key difference being is that it offers less return than Bank Fixed Deposit. They come with a lock-in period of 5 or 10 years and are regarded as safer options as your money remains with government of India. When it comes to tax benefit, you can avail the same under section 80C of the Income Tax Act. It comes with one extra tax benefit i.e. your interest is accrued every year, which means the longer you will remain invested, the more claims you can make for tax deduction.

Other Key Features of NSC
Lock in Period: 5 or 10 Years
Investment Limit: Rs.500-No limit
Return: Depends upon 10 year government bond yield
Tax on Return: Taxable
Loan: On NSC Mortgage
Premature Withdrawal: No
Available In: Post Office

6. Health Insurance
The premiums paid towards your health insurance policy can be claimed for tax deduction under Section 80D of the Income Tax Act. The benefit is available to individuals on health insurance premium paid for self, spouse, children and also parents. The premium paid towards critical illness or medical insurance riders in a life insurance policy also qualify for tax benefit under the same section. The quantum of tax benefit, however, depends on the age of the individual who is medically insured. You can get tax saving upto Rs.40, 000 of expense in health insurance and health-checkup.

The author is Founder, Deal4Loans.

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