Tax Saving Investment in India

Savings play a crucial role in creating a financial cushion in your life. In the absence of a regular income or uncertainty, it provides the necessary means to live comfortably. Many people also create a retirement fund from the day they start earning. However, the harsh realization of negligible savings hit them when they are trapped in the taxpaying cycle.

Paying taxes is inevitable. But, how can you optimize your taxable income in a way to increase your savings? The answer lies in Tax Saving Investments.

What are Tax Saving Investments?

Tax saving investments are a host of investment options that provide tax deductions on your taxable amount. The government has established these tax-saving investments under various sections of the Income Tax Act, 1961, where you can invest a certain amount to avail tax deductions of up to Rs 1.5 lakh on the invested amount.

Here are some of the most common yet effective types of tax-saving investments in India:

Life Insurance: Among the top tax-saving investments, a life insurance policy helps you save a considerable amount of tax. A life insurance policy provides financial protection against eventualities by offering a lump sum amount to the policyholder’s nominees in case of demise. A person can claim a tax deduction under section 80C of up to Rs 1.5 lakh on the paid premium. Further, section 10(10 D) exempts policy benefits such as maturity benefit, survival benefit, and death benefit from the tax.

Public Provident Fund: Experts consider PPF as one of the best tax-saving investments in India. Established by the central government, a PPF is a long-term savings scheme for salaried people. The contributions made towards the PPF account are eligible for tax deductions up to Rs 1.5 lakh under section 80C.

Tax Saving Fixed Deposit: Numerous banks offer tax-saving fixed deposits as an effective tax-saving investment. Similar to bank FDs, they have a lock-in period of 5 years and a fixed interest rate. Under section 80C, you can claim a tax deduction of up to Rs 1.5 lakh.

National Pension Scheme: Established by the central government, this tax saving scheme provides regular income after a retired individual. You are eligible to claim a tax deduction of up to Rs 1.5 lakh on your contributions to the account, along with an additional tax rebate of up to Rs 50,000 under section 80CCD (1B).

Health Insurance: This form of insurance provides financial cover for you and your family’s medical expenses along with being an effective tax-saving investment. Under section 80D, you can avail of tax deductions up to Rs 25,000 on the paid premium. In case you or your spouse is over 60 years of age, the limit increases to Rs 50,000.

Term Insurance: One of the most affordable tax-saving investments in India, term insurance provides a lump sum amount to the nominees in case of the policyholder’s demise. You can claim tax deductions of up to Rs 1.5 lakh on the paid premium. Furthermore, the payout is also exempted from tax.

Senior Citizen Savings Scheme: The scheme provides senior citizens (over the age of 60) a way to ensure tax-saving investment. With a lock-in period of 5 years, the scheme provides quarterly interest on the invested amount. Under section 80C, you can claim tax deductions of up to Rs 1.5 lakh.

Unit Linked Insurance Plans: A blend of tax saving investment and capital appreciation opportunities, ULIPs provide the dual benefit of insurance and investing in assets such as equity, debt, and mutual funds. The premium paid towards the policy is eligible for tax deduction under section 80C. Also, the maturity benefits are tax exempted under section 10 (10D).

Equity Linked Savings Scheme: ELSS is one of the most investing-specific schemes that also make up for an essential tax saving investment. 80% of the contributions are invested in equities with a lock-in period of 3 years. You can claim a tax deduction on your contributions of up to Rs 1.5 lakh under section 80C.

Sukanya Samriddhi Yojana: The scheme is directed towards the holistic financial development of the girl child and offers itself an effective tax-saving investment for the parents. Launched as a part of the ‘Beti Bachao, Beti Padhao’ initiative by the central government, it offers a current interest rate of 7.6%. The investments made in the SSY account are eligible for tax deduction up to Rs 1.5 under section 80C.

Tax Saving Payments = Tax Deductions

Apart from tax-saving investments, you can save tax on certain payments such as donations, home loans, tuition fees, etc. You can look to review your present payments and ensure you claim tax deductions wherever applicable to reduce your taxable income.

Advantages of tax savings in India

Here is why you should consider investing your savings into tax-saving investments:

• One of the most important benefits of tax savings in India is the addition of tax-saving investments to your financial portfolio. As these investments multiply your wealth over time, the process of investing in tax-saving investment options is vital in achieving your financial goals.

• By investing in tax-saving investments, you benefit from long-term investing. It can allow you to save for a financially stable future when you don’t have a regular income source. With these tax-saving investments, you can cover your future financial requirements.

• By investing in tax saving investments, you can establish a financial discipline of setting aside a portion of your savings and can use it as an emergency fund without spending them on regular expenses.

• Tax savings through tax-saving investments also ensure that you reduce your effective taxable income. As you get tax deductions on the tax-saving investments by the Income Tax Department, you pay less tax.

Now that you know about the tax savings investment in India, you can review your finances to ensure you strategically invest in these tax savings investments to save tax and create wealth over time.