Best Tax Saving Schemes in India
Tax planning is always an important aspect of financial planning. To maximize your income and wealth, it is important to have a solid plan to reduce your tax outgo. There are many provisions in the Income Tax Act where you can claim deductions and exemptions on the investments that you do.
List of India’s most popular Income Tax Saving Schemes:
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- Sukanya Samriddhi Yojana
- Tax Saving Bank Fixed Deposit
- Senior Citizen Savings Scheme
- National Pension Scheme (NPS)
- Equity Linked Saving Scheme (ELSS)
- Unit Linked Insurance Plan (ULIP)
- Other Life Insurance Plans
Let’s take a look at some of the popular tax saving schemes in India.
1. Public Provident Fund (PPF):
Public Provident Fund (PPF) is one of the most popular tax saving schemes in India. This government-initiated long-term savings plan helps you create a significant corpus for your post-retirement life along with offering stability.
- Investment into PPF can be started with a minimum deposit of INR 500 and a maximum of INR 1,50,000 in a year and investment holds a maturity tenure of 15 years.
- Currently, the prevailing rate of interest is 7.1% p.a. which is reviewed and subjected to change on a quarterly basis.
- Though the investment is designed for long-term goals, PPF offers flexibility to the investor by allowing withdrawal from the 7th financial year of investment and also offers a loan facility after the 3rd financial year.
- The PPF account can also be extended after maturity in a block of 5 years with further deposits.
- Coming to the tax benefits offered by PPF, the deposit into the PPF account qualifies for the tax deduction of up to INR 1,50,000 a year under Section 80C of the IT Act.
Your PPF investment is also most tax-efficient as it enjoys Exempt-Exempt-Exempt (EEE) tax status. Hence, the PPF maturity proceeds and the interest income are exempt from income tax.
2. National Savings Certificate (NSC)
National Savings Certificate (NSC) is one of the low-risk, long-term tax saving schemes in India initiated by the Government of India through India Post.
- NSC offers a guaranteed return on your investment along with offering great tax benefits and transparency.
- Currently, the prevailing rate of interest is 6.8% p.a. You can start your investment with a minimum of INR 1,000 (with no upper cap) and it holds the maturity tenure of 5 years.
- You can also avail of loan facilities during your investment tenure. Coming to tax benefits, investments in NSC qualify for the tax deduction of up to INR 1,50,000 a year under Section 80C of the Income Tax Act.
- As the interest earned every year gets reinvested, the amount of interest (of the previous year) for the next 4 years qualifies for tax deduction subject to the total limit of INR 1,50,000 under Section 80C.
- However, the 5th year interest is not reinvested and paid back on maturity, it is treated as taxable income in the hands of an investor.
3. Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana is a small deposit scheme launched by the government of India for the bright future of girl children. Parents or legal guardians of girl children below 10 years of age are eligible to invest in the scheme.
- The deposit in the scheme can start with a minimum of INR 250 to a maximum of INR 1,50,000 a year and the deposit can be made for 14 more years.
- The scheme matures on completion of 21 years from the deposit opening date and the account stays operative till the marriage of the girl child.
- Withdrawal for higher education or marriage is allowed after the girl attains the age of 18 years. Currently, the interest rate offered on the deposit is 7.6% p.a.
- Coming to the tax benefits, the deposit into Sukanya Samriddhi Yojana qualifies for the tax deduction of up to INR 1,50,000 a year under Section 80C of the Income Tax Act.
- Interest that gets accrued, withdrawal amount and the maturity proceeds are all exempt from income tax.
4. Tax Saving Bank Fixed Deposit- 5-years
5-year Bank Fixed Deposit is one of the safe tax saver plans that is suitable for conservative investors.
- Your investment offers a guaranteed return and is locked in for 5 years.
- The bank sets the interest rate on fixed deposit which is subjected to review and change on a quarterly basis.
- Deposit amount of up to INR 1,50,000 a year is eligible for tax deduction under Section 80C of the Income Tax Act, 1961.
- However, maturity proceeds are taxable.
5. Senior Citizen Savings Scheme
Senior Citizen Savings Scheme is one of the best tax saving schemes in India designed to provide financial security to senior citizens. The scheme was launched in 2004 by the government of India.
- Indian citizens aged 60 years and above are eligible to invest in this tax saver plan that offers guaranteed returns.
- Investment in the scheme can start with a minimum deposit of INR 1,000 and the tenure of the scheme is for 5 years.
- A maximum of INR 15 lakhs can be invested into the scheme.
- Currently, the prevailing rate of interest is 7.4% p.a and the scheme is offered through many authorized bank branches.
- Coming to tax benefits, investment of up to INR 1,50,000 a year in SCSS is allowed for tax deduction under Section 80C of the Income Tax Act.
6. National Pension Scheme (NPS)
National Pension Scheme (NPS) is a voluntary retirement savings scheme introduced by the Government of India to provide an adequate retirement income to every Indian citizen and a very popular tax saver plan.
- Any Indian citizen between the age of 18 to 65 years can apply for National Pension Scheme provided he/she complies with the KYC norms prescribed.
- NPS has gained a lot of popularity as it is the most tax-efficient and the world’s lowest-cost pension scheme.
- NPS offers great flexibility to choose the investment options/pension funds (equity, fixed income instruments, government securities, and alternative investment schemes are the asset classes available for choice). You can go for active choice or auto choice. However, the scheme restricts the allocation to equity to 50% when you opt for active choice.
- NPS accounts can be opened easily anywhere in India at POP-SP branches of India Post and these accounts can be operated anywhere in the country.
- You can start the investment with a minimum amount of INR 1,000.
- Let’s take a look at the tax benefits offered by National Pension Scheme:
- Investment into NPS of up to INR 1,50,000 is eligible for tax deduction under Section 80C of the Income Tax Act,1961.
- Additional deduction of up to INR 50,000 (NPS contribution) can be claimed under Section 80CCD (1b) of the Income Tax Act.
- The tax deduction is allowed for the employer’s contribution to NPS amounting to up to 10% of salary (basic + dearness allowance) under Section 80 CCD (2) of the IT Act.
7. Equity Linked Saving Scheme (ELSS)
ELSS is a diversified equity mutual fund that comes with a lock-in period of 3 years. As ELSS is a market-linked tax saver plan, the risk and the return potential are moderate to high depending on the portfolio constituents of the fund that you choose. There are many tax saver plans offered by various mutual fund houses and you can choose them based on your investment style and risk-return profile.
- As equity is considered to deliver good returns over the long term, ELSS is not just a great tax saving scheme in India but also is a great tool for long-term wealth creation.
- Depending on your convenience and investment requirement, you can choose to invest in a lump sum or through a systematic investment plan. You can also choose between the growth or dividend option.
- Coming to tax benefits, investment of up to INR 1,50,000 a year in ELSS is allowed for tax deduction under section 80C of the IT Act.
8. Unit Linked Insurance Plan (ULIP)
Unit Linked Insurance Plans (ULIPs) are the hybrid products offered by the insurance companies that offer the triple benefit – insurance protection, tax saver plan, and investment tool.
- ULIPs are designed with various unique and goal-based features that offer flexibility, growth opportunity, and many more.
- ULIP gives you an option to invest in various funds that invest your money in various asset classes like equity and debt in varying proportions based on your risk profile and return expectation.
- Coming to the tax benefits, investment into ULIP qualifies for tax deduction under Section 80C of the Income Tax Act for up to a maximum of INR 1,50,000 a year.
- Proceeds from ULIP are also tax-free under Section 10(10D) of the IT Act provided the sum assured is at least 10 times the annualized premium.
9. Other Life Insurance Plans
Life insurance plans like term insurance that offer pure protection and insurance cum investment plans like endowment plans, whole life insurance plans, money back plans, and child plans, etc are the traditional tax saving schemes in India that mainly offer you protection, wealth creation opportunities along with the benefit of tax.
- Investment into these life insurance plans for up to INR 1,50,000 a year qualifies for tax deduction under Section 80C of the IT Act.
- And the maturity proceeds are tax-free under Section 10(10D) of the IT Act.
To save the tax outgo, there are various tax saving schemes in India. You need to match them with your financial objective, risk profile, and investing requirements.