When the end of a financial year approaches, many people scramble to find ways to reduce their tax liabilities. One effective strategy is to invest in tax-saving instruments that not only offer attractive returns but also provide tax benefits. In this article, we will discuss the top five tax-saving investments that can help you save money on your tax bill.
According to a survey conducted by the Income Tax Department, only around 6% of taxpayers in India utilize the entire tax-saving limit of Rs. 1.5 lakh under Section 80C of the Income Tax Act. This means that the majority of taxpayers are missing out on significant tax savings.
In this article, we will share some examples of tax-saving investments that not only provide tax benefits but also offer various features such as flexibility, liquidity, and long-term wealth creation.
So, let’s dive in and explore these tax-saving investment options in more detail:
1. Public Provident Fund (PPF):
The Public Provident Fund (PPF) is a long-term investment option that offers tax benefits under section 80C of the Income Tax Act. It has a lock-in period of 15 years, and the current interest rate is 7.1% per annum. You can invest a minimum of Rs. 500 and a maximum of Rs. 1.5 lakh in a financial year. The interest earned and the maturity amount are tax-free.
2. Equity-Linked Saving Scheme (ELSS):
An Equity-Linked Saving Scheme (ELSS) is a type of mutual fund that invests primarily in equities. It offers tax benefits under section 80C of the Income Tax Act, and the lock-in period is three years. The returns on ELSS are market-linked, and there is no guaranteed return. However, over the long-term, ELSS has the potential to provide higher returns than traditional tax-saving instruments.
3. National Pension Scheme (NPS):
The National Pension Scheme (NPS) is a voluntary contribution pension scheme that offers tax benefits under section 80C and section 80CCD(1B) of the Income Tax Act. It has a lock-in period until the age of 60, and you can withdraw up to 60% of the corpus tax-free at maturity. The remaining 40% must be used to purchase an annuity. The scheme offers two types of accounts – Tier-I and Tier-II. The Tier-I account is mandatory and has a minimum annual contribution of Rs. 1,000.
4. Tax-Saving Fixed Deposits (FDs):
Tax-Saving Fixed Deposits (FDs) are a popular tax-saving investment option for conservative investors. They offer tax benefits under section 80C of the Income Tax Act and have a lock-in period of five years. The interest rate on tax-saving FDs is generally higher than regular FDs, and the interest earned is taxable.
5. Unit Linked Insurance Plan (ULIP):
A Unit Linked Insurance Plan (ULIP) is a type of insurance plan that offers both insurance coverage and investment opportunities. It offers tax benefits under section 80C and section 10(10D) of the Income Tax Act. The lock-in period is five years, and the returns are market-linked. The policyholder has the flexibility to choose the asset allocation between equity and debt as per their risk appetite.
The end of the financial year generally is the best time to make tax-saving investments but it is always better to stay prepared in advance. While there are many options available, it’s important to choose the one that best suits your investment goals and risk appetite. It’s also important to start early and stay invested for the long-term to maximize the benefits of these tax-saving investments.
These tips are brought to you by the Expert Financial Planners at HappyWise Financial Services.
For any assistance in tax planning for your financial future, feel free to reach out to the Experts at HappyWise on Whatsapp or Email. They can help you create a customized plan that meets your unique needs and goals.