What Are The Best Tax-Saving Instruments In India?

Mutual funds

Eligible citizens of India need to pay income tax and other applicable taxes as per the law; however, income tax does eat into one’s income. Thus, tax planning is imperative not just to save on taxes and maximise income but also to secure your financial future by purchasing and maintaining tax saving investments. In fact, the Income Tax Act, 1961 provides several deductions for different eligible investments, insurance plans  and expenditures made by taxpayers in a given financial year. 

This article will delve into the various such tax saving investment avenues that could tick all the above-mentioned boxes. So, let’s begin!

What are the Best Tax-Saving Instruments?

The most popular tax saving investment options for individuals and Hindu Undivided Families (HUFs) fall under section 80C of the Income Tax Act, 1961. Under this section, taxpayers can claim a maximum deduction benefit of Rs. 1.5 lakh in a financial year by making tax-saving investments or through certain other eligible expenses. 

Highlighted below are some tax-saver investments that allow such deductions:

1. Equity Linked Savings Schemes (ELSS)
2. Public Provident Funds (PPF)
3. Unit Linked Insurance Plans (ULIP)
4. Sukanya Samriddhi Yojana (SSY)
5. Senior Citizen Savings Scheme (SCSS)
6. National Pension System (NPS)
7. National Savings Certificates (NSC)
8. 5-Year Bank Fixed Deposit (FD)

Now let us take a closer look at these schemes.

Also read: Section 80EEA: How To Claim Additional Tax Deduction Benefits On Home Loans?

8 Best Tax-Saving Instruments in India

1. Equity Linked Savings Scheme (ELSS)

• Returns: Depends on the scheme’s performance
• Risk: Moderate to very high depending on the scheme as these are market-linked instruments
• Lock-in period: 3 years
• Tax deduction benefit: Up to Rs.1.5 lakh in an FY under section 80C of the I-T Act

Make the most of your tax-saving investments with the help of Navi Long Term Advantage Fund.  

2. Public Provident Fund (PPF)

• Returns: 7.1% p.a. (for Oct 1, 2021 – Dec 31, 2021, revised quarterly)
• Risk: Extremely low-risk as it enjoys a sovereign guarantee
• Lock-in period: 15 years
• Tax deduction benefit: Up to Rs.1.5 lakh in an FY under section 80C of the I-T Act

3. Unit Linked Insurance Plans (ULIP)

• Returns: Depends on the plan’s performance
• Risk: Moderate to very high
• Lock-in period: 5 years
• Tax deduction benefit: Up to Rs.1.5 lakh in an FY under section 80C of the I-T Act

4. Sukanya Samriddhi Yojana (SSY)

• Returns: 7.60% p.a. (for Oct 1, 2021 – Dec 31, 2021, revised quarterly)
• Risk: Extremely low-risk as it enjoys a sovereign guarantee
• Lock-in period: 21 years
• Tax deduction benefit: Up to Rs.1.5 lakh in an FY under section 80C of the I-T Act

5. Senior Citizen Savings Scheme (SCSS)

• Returns: 7.40% p.a. (for Oct 1, 2021 – Dec 31, 2021, revised and paid quarterly)
• Risk: Extremely low-risk as it enjoys a sovereign guarantee 
• Lock-in period: 5 years
• Tax deduction benefit: Up to Rs.1.5 lakh in an FY under section 80C of the I-T Act

6. National Pension Scheme (NPS)

• Returns: Depends on the performance of the schemes
• Risk: Low to high
• Lock-in period: Till retirement
• Tax-deduction benefit: Up to Rs.1.5 lakh in a FY under section 80C of the I-T Act, and an additional Rs.50,000 (Tier 1 account) under subsection 80CCD (1B)

7. National Savings Certificates (NSC)

• Returns: 6.8% p.a. (for Oct 1, 2021 – Dec 31, 2021, revised quarterly)
• Risk: Extremely low risk
• Lock-in period: 5 years
• Tax deduction benefit: Up to Rs.1.5 lakh in an FY under section 80C of the I-T Act

8. 5-Year Bank Fixed Deposit (FD)

• Returns: 2.75%-7% p.a., depending on the bank
• Risk: Low risk
• Lock-in period: 5 years
• Tax deduction benefit: Up to Rs.1.5 lakh in an FY under section 80C of the I-T Act

Also read: Home Loans Tax Benefits: Exemptions Under Section 80C, 24(b), 80EE, & 80EEA

Other Tax Saving Instruments beyond Section 80C 

Alongside deductions under section 80C, there are several deductions that taxpayers can use to save on income tax, such as:

• Section 80D

Premiums paid for medical insurance policies can be claimed as a deduction up to Rs. 25,000 for self and family. Moreover, if the same is availed for senior citizens, one can claim up to Rs. 1 lakh per annum as a tax deduction. 

• Section 80E

An individual can claim the interest paid on an education loan as a deduction under section 80E. 

• Section 80EE

This section allows deduction of up to Rs. 50,000 on taxpayers’ home loan interest that is over and above the limit of Section 24, subject to terms and conditions. 

• Section 80EEA

Introduced in the 2019 Budget, it allows eligible buyers of new houses under the affordable housing schemes to claim tax deduction benefits of up to Rs. 1.5 lakh per financial year against home loan interest payments, subject to terms and conditions. 

• Section 80G

A donation made by an individual to certain relief funds or charitable institutions can be claimed as a tax deduction.

• Section 80GGA

This section allows taxpayers to claim tax deductions against donations made towards rural development or scientific research. 

• Section 24 

You can claim the interest paid on your home loan as a tax deduction of up to Rs. 2 lakh in a financial year under Section 24.

Maximum Tax Saving  One can Avail

The most popular tax-saving options that an individual can avail of under Section 80C of the Income Tax Act, Section 80C include various investments and expenses, where one can claim deductions up to a limit of Rs. 1.5 lakh in a financial year.

How to Plan Tax Saver Schemes? 

The ideal time to plan your tax savings schemes is the beginning of a financial year. When you plan at the start of a financial year, the investment may compound, which will allow you to achieve your long-term goals. That said, bear in mind that tax-saving should ideally be viewed as an added perk and never a financial goal in itself. Also, you’ll be well-advised to avoid taking last-minute tax-saving steps to prevent committing mistakes. 

So, we suggest that you employ the following points to plan tax-saving for the upcoming financial year:

1. Determine the tax-saving investments and expenses that you already have, such as home loan repayment, insurance premiums, EPF contribution, or children’s tuition fees, etc.
2. Deduct this sum from the Rs. 1.5 lakh figure (which is the upper limit of deduction under section 80C) so that you know how much you should invest in tax saver schemes. 
3. Opt for a tax saver scheme based on your risk appetite and financial goals. Some common instruments in this regard are NPS, ELSS funds, PPF, and tax saver FDs. 

Other Tax Saving Deductions and Exemptions Available to Indian Taxpayers

• If you have been gifted either in cash or kind or vouchers by your employer, the tax exempt is up to Rs 5,000 per year.
• If your employer provides you with meal coupons such as Sodexo and similar,  there is a tax exempt up to Rs 50 per meal. 
• As a taxpayer, you may also incur telecom expenses at your residence. The income tax law allows an employee to claim a tax-free reimbursement of such expenses.

Payments Applicable for Tax Saving Deduction Under Section 80C 

The following are the payments applicable for deduction under section 80C:

• Life insurance premium paid
• Deposits in a provident fund or superannuation fund
• Investments in NSC
• Tuition fees for up to two children
• Housing loan repayment (principal component)
• Registration fees, stamp duty, or any other expense incurred during the purchase or construction of a residential property
• Eligible mutual fund investments (ELSS)
• UTI investments

Also read: Taxation In Mutual Funds

Tips to Save Income Tax 

Now, let us discuss a few useful tips to save on income tax:

1. If you don’t have HRA as part of your salary or if you’re not a  salaried employee, you can claim your house rent as a deduction under section 80GG of the I-T Act.
2. One can contribute an additional sum of Rs. 50,000 to NPS and claim a deduction under section 80CCD (1B).
3. Differently-abled individuals can claim a tax deduction of up to Rs. 1.25 lakh under section 80U of the I-T Act.
4. Individuals with an annual income up to Rs. 5 lakh can claim a full tax rebate under section 87A. 
5. As a taxpayer, if you are in your late 20s and early 30s, and unmarried, or you are married, but only one of you is earning, you can save tax by investing in Term insurance plans or PPF or similar.
6. If you are a single income parent, you can save up to Rs. 1.5 lakh under Section 80C.
7. If you are married and both of you are earning, you can claim more than Rs.8.5 lakh in deductions with investments and insurance. 
8. If you are retired or earning a pension, you can save tax by opting for annuity schemes. 
9. If you are into a family business, you can form a HUF to reduce taxes. 

Final Word

There is an array of tax saving investment options for the taxpaying citizens of India. So, if you are planning to invest in tax saver schemes, we suggest that you consider opting for the ones discussed above. That said, it is imperative to take your financial goals and risk profile into account before investing in any of these avenues.

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Also read: Professional Tax In India – 2021 Tax Slab Rates & Applicability

FAQs on Best Tax-Saving Instruments in India

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.