Investing for saving tax while also aiming for higher returns is a smart financial strategy, with various investment options catering to these goals. There are several investment options giving tax-saving benefits under Section 80C of the Income Tax Act, making them popular choices among investors looking to reduce their tax liabilities.

The government gives several options to investors to park their money in products like Public Provident Fund (PPF), National Pension System (NPS) and long-term FDs where funds can be parked for long term and earn interest. These products cater to different risk profiles and investment horizons, allowing investors to choose based on their financial goals and risk tolerance while enjoying tax-saving benefits.

Let’s understand some popular options for tax-saving investments that offer the potential for attractive returns.

Equity-Linked Savings Schemes (ELSS)

ELSS funds are diversified equity mutual funds with a lock-in period of three years. They offer tax benefits under Section 80C of the Income Tax Act, allowing investors to claim deductions of up to ₹1.5 lakh annually. ELSS funds have the potential to deliver higher returns compared to traditional tax-saving instruments due to their exposure to equity markets.

Also Read: Tax saving options under New Tax Regime most taxpayers may not be aware of

Public Provident Fund (PPF)

PPF is a long-term savings scheme backed by the government of India. It offers tax benefits under Section 80C and has a tenure of 15 years, with the option to extend in blocks of five years. PPF provides tax-free interest, and the current interest rate is competitive. However, it offers lower liquidity compared to mutual funds or stocks.

National Pension System (NPS)

NPS is a voluntary, long-term retirement savings scheme. It offers tax benefits under Section 80CCD(1) and additional benefits under Section 80CCD(1B) for contributions up to ₹50,000. NPS allows investment in equity, corporate bonds, and government securities, offering the potential for higher returns over the long term.

Unit-Linked Insurance Plans (ULIPs)

ULIPs combine insurance and investment components, offering tax benefits under Section 80C. They invest in equity, debt, or a mix of both based on the investor’s risk profile. ULIPs have a lock-in period of five years and provide the potential for market-linked returns.

Tax-Saving Fixed Deposits (FDs)

Several banks offer tax-saving FDs with a lock-in period of five years. Investments in these FDs qualify for tax deductions under Section 80C. While FDs offer capital protection and guaranteed returns, their returns are typically lower than equity-linked instruments over the long term.

Equity and Equity-Related Investments

Apart from ELSS funds, direct investments in stocks, equity mutual funds, and exchange-traded funds (ETFs) also offer tax benefits on long-term gains. Investing in well-managed equity funds can provide inflation-beating returns over time.

Strategies for Optimal Tax-Saving and Returns

1. Diversification: Spread your investments across different asset classes to manage risk and optimize returns.

2. Goal-Based Investing: Align your investments with financial goals and time horizons to choose suitable investment avenues.

3. Regular Review: Monitor and rebalance your portfolio periodically to align with changing market conditions and financial goals.

“Tax planning helps you reduce tax burden by taking advantage of various exemptions, deductions, and tax-saving investments available under the Income Tax Act. Utilising instruments such as Equity-Linked Savings Schemes (ELSS), Public Provident Fund (PPF), National Pension System (NPS) etc. allows taxpayers to claim deductions up to ₹1.5 lakh under Section 80C, thus lowering their taxable income. Tax saving is as important as investment for long-term growth of your investment,” says Adhil Shetty, CEO, Bankbazaar.com.

By combining tax-saving investments strategically with a focus on potential returns, investors can build a diversified portfolio that addresses both financial goals and tax efficiency effectively. Tailoring your investments to your risk tolerance, financial objectives, and tax planning needs is key to achieving long-term wealth creation.