Top 10 Tax Saving Instruments in India

Even when you put much effort into earning your money, paying taxes might be uncomfortable. However, you can access various financial tools to invest, lower your tax liability, and retain a larger portion of your earnings.

This blog will explain the various tax-saving options and how they work. 

Best Tax Saving Instruments in India

It is an investment product carefully chosen to lower the investor’s tax obligations. By investing in these tax-saving strategies, you can reduce the amount of tax you owe by reducing your taxable income.

There are numerous ways to save taxes, a few of which are included below:  

1. Equity Linked Savings Scheme (ELSS)

You can deduct up to 1.5 lakhs from your taxes under Section 80C when investing in mutual funds under the ELSS category. Since the fund manager must allocate at least 80% of total assets to equity-related instruments, the returns offered by this type of mutual fund depend on the market. There is a three year lock-in period on this scheme. You can invest a minimum of INR 500 in this category. 

2. Public Provident Fund (PPF)

One of the most popular tax-saving options for investors is PPF. It has a statutory lock-in duration of 15 years and is backed by the Indian government. The government announces the interest rate investors would earn on this product every quarter. This rate is fixed for the duration of the quarter. Investors have less liquidity because of the required lock-in time. 

3. Senior Citizen Savings Scheme (SCSS)

The post office offers this product for elderly persons (those over 60) or retired. Under Section 80C, tax benefits are up to 1.5 lakh INR. An elderly person may invest a maximum of INR 30 lakh. The central government sets the interest rate that must be paid on it. Interest received under this plan is subject to taxation based on the taxpayer’s applicable slab. 

4. Sukanya Samriddhi Account

This program aims to improve the welfare of Indian girls. It is especially popular with people who want to ensure their daughter’s financial future, as this scheme is backed by the government. Under this program, guardians may open accounts in the names of minor females under the age of ten. A family may open up to two accounts. The government modifies the interest rate under this program every quarter. 

5. Tax Saver Fixed Deposit

Banks offer Tax-saving fixed deposits and provide benefits under Section 80C, and investors can claim tax deductions up to 1.5 Lakhs under this investment option. This product comes with a mandatory lock-in period of 5 years. The interest earned can be taxed per the investor’s tax slab.

6. National Pension Scheme (NPS)

NPS is a defined benefit plan supported by the Indian government and overseen by the Pension Fund Regulatory and Development Authority (PFRDA). Under this approach, a person can open Tier 1 and Tier 2 accounts. However, only contributions made through a Tier 1 account are eligible for the Section 80C tax deduction. In addition, there is a 50000 INR extra deduction available under Section 80CCD(1B). 

7. Unit Link Insurance Plan (ULIP)

This investment product gives you the advantage of investment returns and life insurance coverage in a single product. Part of the premium will go towards providing life insurance coverage and the remainder will be invested in market-linked securities. Usually, this product has a five year lock-in period. The investor can select the fund that best suits their risk tolerance. 

8. Life Insurance

A Section 80C tax deduction is available for paying insurance premiums to cover an individual’s life. In the sad event of the policyholder’s death, life insurance offers financial protection to the individual because the sum assured would be paid to the nominee. The death benefit earned under this insurance product is tax-exempt under Section 10(10D).

9. National Savings Certificates (NSC)

The Indian government is making this investment scheme available through post offices nationwide. The Indian government also sets the interest rate under this, compounded annually and due at maturity. Under this initiative, a minimum investment of INR 1000 can be made. It has a five year lock-in period. It is popular among investors who cannot afford to take financial risks because it is supported by the Indian government. 

10. Capital Guaranteed Plan

It’s an investing plan that provides both money preservation and growth. Investors might benefit from this product by knowing their capital will be shielded from market fluctuations. This is a low-risk investing alternative. You may deduct the amount of your investment from taxes under Section 80C. 

Read Also: Tax Implications of Holding Securities in a Demat Account

Differences Between Various Tax Saving Instruments

Product	Returns	Lock in (Period)
Equity Linked Saving Scheme (ELSS)	Market-oriented	3 Years
Unit Linked Insurance Plan (ULIP)	Market-oriented	5 Years
Public Provident Fund (PPF)	Fixed interest (Decided by the government)	15 Years
Senior Citizen Savings Scheme (SCSS)	Fixed interest (Decided by the government)	5 Years
Sukanya Samridhi Yojna	Fixed Interest (Decided by Government)	21 Years
National Pension Scheme (NPS)	Market Linked	Till 60 years of age.
Life Insurance	Fixed Sum Assured	Depends on Scheme
National Savings Certificate (NSC)	Fixed Interest Rate (Decided by Government)	5 Years
Fixed Deposit	Fixed Interest (Decided by financial institution)	5 Years
Capital Guaranteed Plan	Market Linked	5 Years

Which Product Should an Investor Choose?

The market offers a wide range of investment possibilities to save taxes under Section 80C; however, all investment products that provide a tax benefit have a mandatory lock-in term, which reduces the investor’s liquidity. Because every product has advantages and disadvantages, an investor’s risk tolerance and investing objectives are the primary determinants of choosing the best investment. 

Read Also: Mastering Your Finances: Beginner’s Guide To Tax Savings

Conclusion

Finally, you are aware of the several types of tax-saving options. Since each instrument has unique characteristics, the optimal choice will rely on the investor’s investment goal and risk tolerance. However, you should speak with your tax counselor before choosing one.  

Frequently Asked Questions (FAQs)