How to efficiently invest in tax-saving instruments in India?

“In this world, nothing can be said to be certain except death and taxes.” – Benjamin Franklin

While you cannot plan for your death, you can certainly plan for reducing your tax liabilities. If you are earning more than Rs. 5 lakh, you are liable to pay taxes in India as per the Income Tax Act 1961. It makes tax planning imperative. Tax planning helps you invest money in a fashion that helps you save taxes. In this article, we will talk about such tax-saving instruments and the benefits they provide.

Which tax-saving instruments can you invest in?

As enticing as it looks, choosing the right tax-saving investments in India can be challenging. However, you can always consult a tax planner to make your job easier.

Equity Linked Savings Scheme (ELSS)

ELSS is one of the most popular tools for tax-saving investments in India. With ELSS, you can claim tax deductions up to Rs. 1.5 lakh section 80C and also earn substantial returns via equity market investments. However, there is a lock-in period of 3 years. ELSS invests around 80% in equity, which makes it the highest-yielding tax-saving instrument in the market. The average10-year returns on ELSS have been around 15%. Any gain less than Rs. 1 lakh is not charged with long-term capital gains tax.

Public Provident Fund (PPF)

The Public Provident Fund is backed by the Indian Government, making it one of the safest tax-saving instruments. However, your money gets locked in for 15 years in a PPF. The Indian government announces the fixed interest rates on this instrument every quarter. A maximum of 1.5 lakh can be claimed for deduction in a year in PPF under section 80C. The current interest rate on PPF for Q3FY23 is 7.1%.

National Pension Scheme (NPS)

NPS is a systematic investment plan that strives to provide financial security for your second innings of life. You can claim up to Rs. 1.5 lakh per annum under section 80C for tax deductions. The returns are varied based on the equity-to-debt ratio chosen by you. For example, for a 60:40 ratio, the returns can be around 10% per annum.

Tax-saving fixed deposits

Fixed Deposits (FDs) are one of the most popular household choices for investing money. By investing in tax-saving FDs, you can claim tax deductions of up to Rs. 1.5 lakh. However, there is a lock-in period of 5 years. Bear in mind that any premature withdrawal will nullify the tax benefits.

Government schemes

Senior Citizen Savings Scheme (SCSS) offers you a deduction of up to Rs. 1.5 lakh under section 80C. For FY22, the interest on this scheme was 7.4%; it is credited quarterly. You have to be 60+ to invest in this scheme. You can open this account in the name of your senior citizen parent. Sukanya Samriddhi Yojna (SSY) is another scheme that helps you to save taxes of up to Rs. 1.5 lakh and offers you an interest rate of 7.6% p.a. However, an account under this scheme can only be opened if you have a daughter less than ten years old.

Life and Health Insurance

Under Section 80C and 80D, respectively, a premium paid on a life insurance policy and a health insurance policy is deductible. For life insurance, the cap is Rs. 1.5 lakh. For health insurance, you can claim a deduction up to Rs. 75,000 = 25,000 for <60, and Rs. 50,000 for senior citizens. You can claim deductions on premiums paid only for yourself, your spouse, parents, and dependent children.

Tax-saving instruments offer a double bonanza

A famous saying goes, “A penny saved is a penny earned”. By planning for taxes in advance, you can save taxes on investing in these tax-saving instruments while also earning returns. For instance, by investing in an ELSS fund, you can claim Rs. 1.5 lakh in deduction and also get returns almost equivalent to equity market instruments like stocks. Also, the more money you save, the more you can invest as per your goals and build wealth in the long run.

Conclusion

While there are multiple ways you can save taxes, it is prudent to select an option that is most relevant to you in terms of your investment objectives and return criteria. As an investor, you must clearly understand these products before investing. To avoid misses, you can always take the help of a financial advisor to evaluate the best product based on your circumstances.