9 Top Income Tax Saving Instruments You Must Know

Managing finances effectively involves not just saving money but also minimising your tax burden. The Indian Government offers a variety of tax-saving instruments that allow you to invest while reducing your taxable income. This blog explores some of the most popular tax-saving investments, helping you to learn how to save tax. Choose the ones that best suit your financial goals and risk tolerance. Keep reading!

Top 9 Income Tax Saving Instruments

1. National Savings Certificates (NSC)

NSC (National Savings Certificate) is a government-backed savings certificate that comes with a fixed interest rate and a fixed maturity period of 5 and 10 years. The interest earned on NSC is compounded annually. NSC provides a safe and secure investment option with guaranteed returns and tax benefits.

• Tax Benefit

If you are wondering how to save income tax, investments in National Savings Certificates (NSC) are eligible for tax deduction under Section 80C of Income Tax Act, 1961. You can claim deductions of up to Rs. 1.5 Lakh on the principal amount invested in NSC as well as the interest reinvested.

2. Tax Saver Fixed Deposit (FD)

Tax saver fixed deposits (FDs) are similar to regular fixed deposits but offer tax benefits.  Banks typically offer slightly higher interest rates on tax-saver FDs compared to regular FDs. The lock-in period for tax-saver FDs is 5 years.

• Tax Benefit

Investments towards tax-saver FDs qualify for tax deductions under Section 80C of the Income Tax Act, 1961. You can claim deduction up to 1.5 Lakh under Section 80C of the Income Tax Act, 1961.  Tax saver FDs provide a secure investment option with guaranteed returns and tax advantages.

3. Equity Linked Saving Scheme (ELSS)

ELSS (Equity Linked Saving Scheme) is a type of mutual fund that invests a significant portion of its corpus in the stock market. ELSS comes with a mandatory lock-in period of 3 years, making it suitable for long-term financial goals.

• Tax Benefit

Investments in ELSS qualify for tax deductions under Section 80C of the Income Tax Act, 1961 with a maximum limit of Rs. 1.5 Lakh per year. Also, you are not required to pay long-term capital gains tax on capital gains of up to Rs. 1 Lakh in a financial year.

4. Unit Linked Insurance Plans (ULIP)

ULIPs (Unit Linked Insurance Plans) combine insurance coverage with investment benefits.  A portion of the premium goes towards providing life insurance, while the remaining amount is invested in the stock market. However, ULIPs come with charges and market risks, so careful evaluation is necessary.

• Tax Benefit

Individuals can claim tax deductions of up to Rs. 1,50,000 on the premiums paid towards Unit-Linked Insurance Plans (ULIPs) under the provisions of Section 80C of the Income Tax Act, 1961. Maturity benefits received are exempt from taxes under Section 10 (10D) of the Income Tax Act, 1961 subject to certain conditions.

5. Public Provident Fund (PPF)

PPF (Public Provident Fund) is a government-backed savings scheme known for its safety and guaranteed returns. The interest rate on PPF is set by the government every quarter. PPF offers a long lock-in period of 15 years, with partial withdrawals allowed after 7 years. A maximum of Rs. 1.5 Lakh per annum can be invested towards PPF.

• Tax Benefit

Contributions towards PPF qualify for tax deduction under Section 80C of Income Tax Act, 1961. Moreover, the interest earned and the total amount received after maturity are exempt from taxes, making it a triple tax-exempt investment.

6. Senior Citizen Savings Scheme (SCSS)

SCSS (Senior Citizen Savings Scheme) is a government savings scheme exclusively for Indian residents over 60 years of age. It offers a higher interest rate compared to regular savings accounts and fixed deposits. The investment limit is Rs. 15 Lakh, and the lock-in period is 5 years. A depositor has the option to extend the maturity period for an additional three years.

• Tax Benefit

Deposits towards SCSS of up to Rs. 1.5 Lakh annually qualify for tax deductions under Section 80C of the Income Tax Act, 1961. SCSS provides a safe and reliable source of income for senior citizens with attractive tax benefits. It is important to keep in mind that interest earned on deposits exceeding Rs. 50,000 is taxable.

7. Sukanya Samriddhi Yojana (SSY)

SSY (Sukanya Samriddhi Yojana) is a government savings scheme specifically designed to promote girl child education and empower women.  Only a parent or legal guardian can open an SSY account for a girl child below 10 years of age. The scheme offers attractive interest rates and a maturity period of 21 years. Sukanya Samriddhi Yojana provides an excellent way to save for a girl child's future while enjoying tax benefits.

• Tax Benefit

Contributions of up to Rs. 1.5 Lakh per year towards SSY qualify for tax deductions under Section 80C of the Income Tax Act, 1961.

8. National Pension Scheme (NPS)

When thinking about how to save tax on salary, NPS (National Pension Scheme) emerges as a great option. It is a voluntary pension scheme aimed at providing retirement income. It offers a mix of equity, corporate debt, and government bonds, catering to different risk appetites. NPS offers a long-term solution for retirement planning with significant tax benefits.

• Tax Benefit

Individuals can claim deductions of up to 10% of their salary or Rs. 1.5 Lakh, whichever is lower, under Section 80CCD (1), and an additional Rs. 50,000 deduction under Section 80CCD(1B), up and over the overall limit of Rs. 1.5 Lakh under Section 80CCE. Other than that, the employer's contribution towards NPS is also tax-deductible.

Also, Section 80CCD (5) offers a tax exemption on annuity purchases or superannuation at the age of 60. However, the income received from the annuity afterwards is subject to taxation under Section 80CCD (3).

9. Life Insurance

Life insurance plans primarily provide financial protection to your loved ones in case of your demise.  While some life insurance plans offer investment benefits, their primary focus is providing life cover. Life insurance is an essential tool for financial security, but tax benefits should be a secondary consideration.

• Tax Benefit

Premiums paid towards traditional life insurance plans qualify for tax deduction under Section 80C, with a maximum limit of Rs. 1.5 Lakh. The maturity proceeds are tax-exempt under Section 10 (10D) of the Income Tax Act, 1961 subject to certain conditions while the sum assured is entirely exempt upon the policyholder's death.

Also Read - Tax Exemption & Its Various Categories

Comparison of Various Tax-Saving Instruments

Here is a table comparing various tax-saving instruments:

Instrument	Tax Deduction	Lock-in Period	Investment Options	Other Features
Equity Linked Saving Scheme (ELSS)	Up to Rs. 1.5 Lakh under Section 80C	3 years	Equity mutual funds	Market-linked returns, higher risk-return potential
Public Provident Fund (PPF)	Up to Rs. 1.5 Lakh under Section 80C	15 years	Fixed-income investment	Guaranteed returns, government-backed
Senior Citizen Savings Scheme (SCSS)	Up to Rs. 1.5 Lakh under Section 80C	5 years	Fixed-income investment	Guaranteed returns, suitable for senior citizens
Sukanya Samriddhi Yojana (SSY)	Up to Rs. 1.5 Lakh under Section 80C	Until the girl child turns 21	Fixed-income investment	Encourages saving for girl child's future, higher returns and government-backed
Tax Saver Fixed Deposit (FD)	Up to Rs. 1.5 Lakh under Section 80C	5 years	Fixed-income investment	Guaranteed returns, lower risk
National Pension Scheme (NPS)	Up to Rs. 1.5 Lakh under Section 80CCD (1) and an additional Rs. 50,000 under Section 80CCD(1B)	Locked until retirement	Equity, debt, and alternative investments	Retirement planning, government-backed
National Savings Certificates (NSC)	Up to Rs. 1.5 Lakh under Section 80C	5 years	Fixed-income investment	Guaranteed returns, government-backed
Unit Linked Insurance Plans (ULIP)	Up to Rs. 1.5 Lakh under Sections 10(10D) and 80C	5 years	Equity, debt, and money market instruments	Market-linked returns, life insurance coverage
Life Insurance	Up to Rs. 1.5 Lakh under Section 80C	Depends on the policy term	N/A	Risk coverage, tax-free maturity benefits

 

Also Read - Professional Tax - Its Meaning, Slab Rates, and Compliance

To Conclude

Tax-saving instruments are crucial for optimising your tax savings and achieving your financial goals. By understanding how to save tax and the distinct features of these schemes, you can build a diversified portfolio aligned with your risk tolerance, time horizon, and specific objectives. This allows you to maximise your savings while minimising your tax burden, laying a strong foundation for your financial well-being.

Disclaimer

This blog provides informational content on tax benefits and rules based on the current provisions of the Income Tax Act of India, 1961. The interpretations are subject to change as per amendments made by the Government of India. Applicable rates of GST and cess will be as per the current regulations. Readers must seek professional advice for accurate and up-to-date information.
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