Make your money work: Investment options for tax savings!

tax saving investment options
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A penny saved is a penny earned. And one of the smartest ways in which you can save your hard-earned money is by making investments that offer tax benefits.
Tax-saving investments, if done wisely, not only helps you build a financial cushion for tough times but also ensures that you money utilized wisely and in ways, you need it the most. To grasp the idea of tax savings, it's important to first understand what Income tax slabs are.

What are Income Tax Slabs?

Income tax slabs are designed to categorise income earners in India into different taxpayer categories. This means that your tax liability increases as your income increases.
However, income tax slabs are subject to change with every Union Budget presented at the end of the financial year.

In addition, income tax is imposed under three different age categories:

  1. Individuals who are less than 60 years of age (both residents and non-residents)
  2. Senior Citizens between 60 to 80 years of age
  3. Super Senior Citizens more than 80 years of age

So, what are some good tax saving options?

Tax-saving is a crucial strategy for investors to safeguard their total income from erosion. There are several investment options that offer this advantage, resulting in a notable boost to one's investment portfolio.

Let us explore some of the tax-saving investment options that can effectively reduce your tax liability:

Equity linked Savings Scheme (ELSS)

  • Investing in ELSS mutual funds can help you save taxes as well as accumulate wealth over time.
  • ELSS mutual funds come with a lock-in period of 3 years, and it is considered as one of the most effective ways to save on taxes under section 80C.
  • It has the potential for long term growth through market participation.
  • Another major advantage of investing in ELSS mutual funds is that the principal amount invested in ELSS is exempt from taxation up to Rs. 1.5 lakh.
  • If the capital gains arising from ELSS funds is below Rs.1 lakh, then the gains are not subjected to long-term capital gains tax.
  • ELSS mutual funds offer relatively higher liquidity compared to other tax-saving securities.

Public Provident Fund (PPF)

  • Sponsored by the Government of India, PPF is considered one of the best tax-saving instruments under Section 80C.
  • Comes with a mandatory lock-in period of 15 years, which may affect investor liquidity requirements.
  • Offers a fixed return instrument with interest rate declared by the government every quarter and remains fixed for the given period.
  • Maximum investment limit of Rs.1.5 lakh per financial year.
  • Entire investment amount is exempt from taxation, making it a popular tax-saving option.
  • Any interest earned on the investment amount is also not considered for tax calculations.

Senior Citizen Savings Scheme (SCSS)

  • SCSS is a tax-saving investment under Section 80C, allowing for a deduction of up to Rs. 1.5 lakh on the investment amount.
  • Eligibility criteria for SCSS are more rigid, limited to individuals aged 60 years and above, above the age of 55 years availing voluntary retirement, and above the age of 50 years employed in the defence sector of India.
  • Maximum investment limit in SCSS policy is Rs. 15 lakh.
  • Interest rate payable is determined by the Government of India, providing stable returns.

Sukanya Samriddhi Yojna (SSY)

  • Sukanya Samriddhi Yojna (SSY) is a popular tax-saving option under Section 80C of the Income Tax Act.
  • SSY offers benefits of up to Rs. 1.5 lakh per annum.
  • Only individuals with daughters who are less than 10 years old can open an SSY account, as it is part of the 'Beti Bachao Beti Padhao' policy.
  • SSY offers a higher interest rate than other government-mandated instruments like Public Provident Fund.
  • Any investment exceeding Rs.1.5 lakh in a year does not qualify for SSY tax benefits.

How to save taxes if you have an income of Rs. 12 lakh per annum?

January to March is generally the time when salaried individuals start planning for tax savings, as they need to submit their investment declaration and expenditure details.
But ideally, tax planning should begin at the start of the year, where you can discuss with your employer the allowances or exempt income you are eligible for, and how to maximize the benefits from them. Nevertheless, here is a method that allows you to pay almost zero taxes if you have an income of Rs. 12 LPA
(For illustrative purpose only)

How to pay almost zero income tax with the income of Rs 12 LPA;  
Reasons Remaining amount
No taxes up to Rs.3,00,000 as per new tax slab Rs.8,00,000
Rs.50,000 is treated as standard deduction. Meaning, it is presumed that an individual will use Rs. 50,000 for expenses at home Rs. 7,50,000
Savings up to Rs.1,50,000 in 80C Rs. 6,00,000
No taxes for Rs.50,000 if you put in NPS Rs. 5,50,000
No taxes on Rs.25,000 health insurance for self and Rs.50,000 health insurance for parents Rs. 4,75,000
If HRA Component is Rs.2,00,000 Rs. 2,75,000
Interest on Education Loan up to Rs.40,000 Rs. 2,35,000
10% contribution to employer in NPS (Assuming Rs. 1,20,000) Rs. 1,15,000
Leave Travel Allowance As per expenses

Instead of waiting till the end of the financial year and opting for last-minute ad-hoc investments, it's wiser to begin early in the financial year. This will allow you to carefully plan your investments in alignment with your financial goals and avail maximum tax benefits. By taking a proactive approach, you can reap the benefits of a well-planned and fruitful financial future.


Which scheme is best for tax saving?

The best tax-saving scheme or investment option for you depends on various factors, such as your financial goals, risk tolerance, investment horizon, and individual tax situation.

What are the tax saving schemes?

Tax-saving schemes are investment avenues that allow you to significantly reduce your tax liability. Here's a list:

  • Public Provident Fund (PPF)
  • Equity-Linked Saving Schemes (ELSS)
  • National Pension Scheme (NPS)
  • Sukanya Samriddhi Yojana (SSY)
  • Tax-saving Fixed Deposits
  • Employee Provident Fund (EPF)
  • Life Insurance Premiums
  • Senior Citizen Savings Scheme (SCSS)

What is an effective strategy to reduce taxable income?

An effective strategy to reduce taxable income in India is to utilize deductions and exemptions available under the Income Tax Act, such as investing in tax-saving schemes, claiming allowable expenses, and utilizing exemptions for specific investments and expenditures. Consulting a qualified tax advisor or financial professional can help in devising an effective tax planning strategy in compliance with Indian tax laws.

How to save tax on Rs.15 lakh annual salary?

To save tax on a Rs.15 lakh salary in India, you can consider various strategies, such as investing in tax-saving instruments like Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), National Pension Scheme (NPS), and claiming deductions for allowable expenses like House Rent Allowance (HRA), Medical expenses, and others. It is advisable to seek guidance from a qualified tax advisor for personalized tax planning.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.