Best tax-saving
investment options for salaried individuals in india
For salaried
individuals in India, tax-saving investments are crucial for effective
financial planning. They not only help in reducing taxable income but also aid
in accumulating wealth for future needs. Here are some of the most popular and
effective tax-saving investment options available under Section 80C and beyond.
1. Public provident fund
(PPF)
The Public
Provident Fund is a long-term investment option backed by the government of
India. It offers a combination of safety, returns, and tax savings.
Key features:
Tax benefit: Investments up to ₹1.5 lakh per annum qualify
for tax deduction under Section 80C.
Interest rate: The current interest rate is around 7.1% per
annum, compounded annually.
Tenure: The lock-in period is 15 years, with an option
to extend in blocks of 5 years.
Risk: Minimal, as it is government-backed.
Advantages:
Tax-free returns.
Low risk.
Suitable for long-term goals like retirement.
2. Employees’
Provident Fund (EPF)
For salaried
employees, the EPF is a compulsory savings scheme managed by the Employees'
Provident Fund Organization (EPFO).
Key features:
Tax benefit: Employee contributions up to ₹1.5 lakh
qualify for deduction under Section 80C.
Interest rate: The current rate is around 8.5% per annum.
Tenure: Until retirement or resignation.
Risk: Low, as it is a statutory scheme.
Advantages:
Employer’s contribution also adds to the corpus.
Tax-free interest and maturity amount.
Ensures a retirement corpus.
3. National pension system
(NPS)
The NPS is a
government-sponsored pension scheme aimed at providing retirement income.
Key features:
Tax benefit: Contributions up to ₹1.5 lakh under Section
80C, and an additional ₹50,000 under Section 80CCD(1B).
Returns: Market-linked, as funds are invested in
equities, corporate bonds, and government securities.
Tenure: Until the age of 60, with a partial withdrawal
option after 3 years.
Risk: Moderate to high, depending on the chosen
investment mix.
Advantages:
Flexibility in investment choice.
Additional tax benefit of ₹50,000.
Option to receive a regular pension post-retirement.
4. Equity-linked
savings scheme (ELSS)
ELSS funds are
mutual funds that invest primarily in equities and offer tax benefits under
Section 80C.
Key features:
Tax benefit: Investments up to ₹1.5 lakh qualify for
deduction.
Returns: Market-linked, typically higher due to equity
exposure.
Tenure: Minimum lock-in period of 3 years.
Risk: High, due to equity market volatility.
Advantages:
Potential for higher returns.
Shortest lock-in period among 80C options.
Diversified equity portfolio managed by professionals.
5. Life insurance premiums
Premiums paid for
life insurance policies also qualify for tax deduction under Section 80C.
Key features:
Tax benefit: Premiums up to ₹1.5 lakh qualify for
deduction.
Returns: Depends on the type of policy (e.g., term
insurance, endowment plans, ULIPs).
Tenure: Varies with the policy term.
Risk: Varies, generally low for traditional plans
and higher for ULIPs.
Advantages:
Provides financial security to dependents.
Combination of protection and savings.
Tax-free death benefits under Section 10(10D).
6. Sukanya samriddhi
yojana (SSY)
A scheme for the
girl child, offering high returns along with tax benefits.
Key features:
Tax benefit: Investments up to ₹1.5 lakh qualify for
deduction under Section 80C.
Interest rate: Currently around 7.6% per annum, compounded
annually.
Tenure: Until the girl child turns 21 or upon her
marriage after 18.
Risk: Low, as it is government-backed.
Advantages:
Attractive interest rate.
Ensures financial security for the girl child.
Entire maturity amount is tax-free.
7. Fixed deposits
(FDs) with tax benefits
Certain fixed
deposits offer tax benefits under Section 80C.
Key features:
Tax benefit: Investments up to ₹1.5 lakh qualify for
deduction.
Interest rate: Varies between 5% and 7%, depending on the
bank.
Tenure: Minimum lock-in period of 5 years.
Risk: Low, but subject to bank’s credibility.
Advantages:
Guaranteed returns.
Safe investment option.
Easy to manage and understand.
8. Unit linked
insurance plans (ULIPs)
ULIPs are
insurance-cum-investment products that provide life cover along with investment
in various funds.
Key features:
Tax benefit: Premiums up to ₹1.5 lakh qualify for deduction
under Section 80C.
Returns: Market-linked, depends on the performance of
the chosen funds.
Tenure: Minimum lock-in period of 5 years.
Risk: Varies, based on the equity exposure.
Advantages:
Dual benefit of insurance and investment.
Flexibility to switch funds.
Tax-free maturity benefits under Section 10(10D).
9. Senior citizens’
saving scheme (SCSS)
Specifically
designed for senior citizens, SCSS offers regular income with tax benefits.
Key features:
Tax benefit: Investments up to ₹1.5 lakh qualify for
deduction under Section 80C.
Interest rate: Currently around 8% per annum, paid quarterly.
Tenure: 5 years, extendable by 3 years.
Risk: Low, as it is backed by the government.
Advantages:
High interest rate.
Safe investment option.
Regular income source for retirees.
10. National savings
certificate (NSC)
NSC is a
fixed-income investment scheme that you can open with any post office in India.
Key features:
Tax benefit: Investments up to ₹1.5 lakh qualify for
deduction under Section 80C.
Interest rate: Currently around 6.8% per annum, compounded
annually but payable at maturity.
Tenure: 5 years.
Risk: Low, as it is backed by the government.
Advantages:
Guaranteed returns.
Minimal risk.
Suitable for conservative investors.
11. Tax saving bonds
These are bonds
issued by the government or government-backed institutions that offer tax
benefits.
Key features:
Tax benefit: Investments up to ₹1.5 lakh qualify for
deduction under Section 80C.
Interest rate: Varies between 5% and 7%.
Tenure: Minimum lock-in period of 5 years.
Risk: Low to moderate, depending on the issuing
institution.
Advantages:
Safe investment option.
Guaranteed returns.
Helps in diversifying the investment portfolio.
Conclusion
Selecting the right tax-saving investment depends on
individual financial goals, risk appetite, and investment horizon. Diversifying
across various options can optimize returns while ensuring tax efficiency.
Here's a quick summary of the key factors to consider for each option:
PPF: Best for long-term safety and tax-free
returns.
EPF: Ideal for salaried employees aiming for a
substantial retirement corpus.
NPS: Suitable for those looking for an additional
pension plan with extra tax benefits.
ELSS: Offers the potential for high returns with the
shortest lock-in period.
Life insurance: Provides security to dependents along with tax
benefits.
SSY: Best for securing the financial future of a
girl child.
FDs: A safe and easy-to-understand option with
guaranteed returns.
ULIPs: Combines investment and insurance with
flexibility.
SCSS: Designed for senior citizens looking for
regular income.
NSC: A low-risk option with guaranteed returns.
Tax saving bonds:
Safe and helps in portfolio
diversification.
It's advisable to review and adjust the investment portfolio
regularly to align with changing financial circumstances and tax regulations.
This ensures that you maximize your tax savings while also working towards your
long-term financial goals.
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