How to Save Tax 101: A Comprehensive Guide to Tax Saving Investment Options

Tax saving can often be a stressful task for many individuals, but it doesn’t have to be. By strategically investing in tax-saving instruments, you can not only reduce your tax obligation but also build a secure financial future with ample savings. In this comprehensive guide, we’ll explore various tax-saving investment options with a focus on banking instruments, helping you make informed decisions to optimize your tax savings.

Understanding Tax Saving Investments

Before delving into the specifics of various instruments, let’s first understand the significance of tax-saving investments. The government provides various avenues for taxpayers to save on taxes under Section 80C and other sections of the Income Tax Act. These investments not only reduce your taxable income but also offer the potential for wealth creation.

First thing first, what is Section 80C?

Section 80C is one of the section in Income Tax Act, 1961 which allows taxpayers to claim deductions on their taxable income by investing in deposit schemes and expenditures. As of the current regulations, you can claim deductions of up to Rs. 1.5 lakh in a fiscal year under this provision. It’s important to note that the Rs. 1.5 lakh limit applies cumulatively to all the eligible investments and expenses under Section 80C.

Now, let’s focus on how you can utilize various financial and banking instruments to save on taxes effectively.

Tax-saving investments can be broadly categorized into the following types:

1. Tax Saving Fixed Deposits (FDs): Fixed deposits with banks are a simple yet effective way to save taxes. They offer tax deductions under Section 80C and come with various tenures and interest rates. These are a popular choice among individuals looking for a safe and guaranteed return on their investments. Here’s what you need to know:

• Lock-in Period: Tax-saving FDs come with a lock-in period of 5 years, which means your money remains invested for this duration.
• Tax Benefit: Investments in tax-saving FDs are eligible for deductions under Section 80C, up to a maximum limit of Rs. 1.5 lakh in a financial year.
• Interest Taxation: The interest earned on tax-saving FDs is taxable as per your income tax slab.

2. Public Provident Fund (PPF): PPF is a long-term savings and investment scheme offered by the Government of India and falls under the category of small savings schemes.

• Government-backed savings scheme thus making it one of the safest investment options in India.
• Offers opportunity to claim tax deductions under Section 80C.
• Longer lock-in period of 15 years, in comparison to many other tax saving investments. It also offers the flexibility of partial withdrawals from the 7th year onwards, allowing individuals to access a portion of their savings if needed
• Known for its attractive interest rates which are typically higher than those offered by regular savings account and fixed deposit. The interest is compounded annually, which means that you earn interest on both the principal amount and the previously accumulated interest.
• Interest earned as well as the maturity amount are tax free.

3. National Savings Certificate (NSC): NSC is a government backed savings scheme available to Indian residents. It is a fixed-income investment option as it offers a predefined rate of interest set by govt. NSC is eligible for tax deductions under Section 80C of the Income Tax Act, 1961. It has a lock-in period of 5 years and provides a guaranteed return. Thus, it is a suitable choice for individuals looking for safety, predictable returns, and tax benefits over a 5-year investment horizon.

The interest income accrued from NSC is subject to taxation based on the investor’s tax bracket. However, the interest earned on NSC is not paid to the investor every financial year.

4. Senior Citizens’ Saving Scheme (SCSS): Designed for senior citizens aged 60 years and above, this scheme provides tax benefits under Section 80C. Here’s what you should know:

• One can invest maximum amount of Rs 30 Lakh.
• Eligibility: As mentioned, this scheme is exclusively for senior citizens. However, retired individuals aged 55-60 can also invest in it but they need to make the investment within a month of receiving the retirement benefits.
• Lock-in Period: The SCSS has a lock-in period of 5 years, which can be extended for an additional 3 years after maturity.
• Interest Rate: The interest rate on SCSS is set by the government and is subject to change. It is typically higher than regular FDs.
• Tax Benefit: Investments in the SCSS qualify for deductions under Section 80C, subject to the overall limit of Rs. 1.5 lakh.
• Interest Taxation: Interest income from the SCSS is fully taxable, if it exceeds Rs 50,000 in a fiscal year.

5. Sukanya Samriddhi Yojana (SSY): Sukanya Samriddhi Yojana is an excellent tax-saving investment scheme in India that is specifically designed for the benefit of the girl child. Key traits of the scheme are:

• Only one account can be opened for a girl child (under the age of 10) and maximum of 2 girl children in one family. An SSY account holder can invest minimum Rs 250 & Maximum Rs 1,50,000 in a Financial Year.
• Lock in Period: Scheme comes with a lock-in period, typically until the girl child reaches 21 years of age or gets married, whichever is earlier. Partial withdrawal can be made for educational purposes after the girl child attains the age of 18 years or after passing 10^th standard, whichever is earlier.
• Tax Deductions: Under Section 80C of the Income Tax Act, contributions made to the SSY account are eligible for tax deductions. This means that you can reduce your taxable income by the amount you invest in your daughter’s SSY account, up to a maximum limit of Rs. 1.5 lakh per financial year.
• Tax-Free Returns: Not only does SSY help you save on taxes, but it also offers tax-free returns. The interest earned on the SSY account and the maturity amount are both exempt from income tax.

Click here to read more about Sukanya Samriddhi Yojana.

6. Insurance: Life and health insurance policies offer significant tax-saving benefits. These policies can help you reduce your taxable income and, in turn, lower your overall tax liability. Here’s how life and health insurance can help you save on taxes in India:

• Premiums paid for life insurance policies, including term insurance and endowment plans, are eligible for deductions under Section 80C of the Income Tax Act. Additionally, the proceeds received from a life insurance policy upon maturity or in the event of the policyholder’s demise are generally tax-free under Section 10(10D) of the Income Tax Act. This means that the maturity amount or death benefit is exempt from income tax. Exception to this, is that as per latest CBDT guidelines, policies bought on or after 01.04.2023 will not be fully tax exempt i.e. the maturity amount will be taxable if the premium paid in a financial year exceeds Rs. 5 Lakh.
• Premiums paid for health insurance policies, including individual and family health plans, are eligible for deductions under Section 80D of the Income Tax Act.

These tax benefits associated with life and health insurance policies in India not only encourage individuals to protect their financial well-being and health but also provide a valuable avenue for tax-saving.

7. NPS (National Pension System): It is a voluntary tax-saving investment option that offers financial security through regular post-retirement income.

• Open to all Indian citizens between 18 and 65, including private and public sector employees.
• Offers two types of accounts, Tier 1 and Tier 2. To open a Tier 2 account, customer must have an active Tier 1 account
• Tax Benefits offered under Section 80CCD(1) and Section 80CCD(2) of the Income Tax Act. Customers can claim a deduction of up to 10% of their salary (for salaried individuals) or gross income (for self-employed individuals) under Section 80CCD(1). Additionally, customers can claim a deduction of up to Rs. 50,000 under Section 80CCD(1B), which is over and above Section 80C limits. Furthermore, customers employed by the Central Government or any other employer can request an additional deduction of up to 14% ( Central Government or State Government) and 10% ( for any other employer) of their basic salary (plus dearness allowance) under Section 80CCD(2).

Visit link to know more about the scheme.

8. Equity-Linked Savings Schemes (ELSS): ELSS funds are mutual funds that primarily invest in equities or stocks. ELSS is designed to provide investors with the opportunity to participate in the stock market while also offering tax-saving benefits.

• Offer tax deductions under Section 80C
• Lock-in period is of three years which is relatively shorter in comparison to many other tax saving tools.  However, long term capital gains from ELSS exceeding Rs. 1 Lakh a year, is subject to a 10% tax, without the benefit of indexation.
• Popular choice for those seeking higher returns, as ELSS funds primarily invest in equities, which historically have the potential to offer higher returns compared to traditional fixed-income investments.

It’s important to note that the returns from ELSS funds are market-linked and subject to market fluctuations. While they have the potential for higher returns, they also come with higher risk levels.

9. Unit Linked Insurance Plans (ULIPs): ULIPs are financial products that combine both insurance and investment components into a single policy. A portion of the premium you pay for a ULIP goes toward providing life insurance coverage and the remaining portion of the premium is invested in a range of investment funds, which can include equity, debt, or a combination of both, as chosen by the policy holders. Premiums paid for ULIPs are eligible for deductions up to Rs. 1.5 lakh per year under Section 80C of the Income Tax Act and the maturity or death benefit is generally tax-free. However, do note as per latest CBDT guidelines, for ULIPs purchased on or after 01.02.2021, proceeds i.e. returns at maturity will be taxable if the premium paid is more than Rs. 2.5 Lakh in a fiscal year, except death benefits.

10. Loans: Taking certain types of loans can provide tax benefits under specific sections of the Income Tax Act such as home loan and education loans.

• Home Loan: Interest paid on a home loan is eligible for deductions under Section 24(b) of the Income Tax Act up to a maximum limit of Rs. 2 lakh (subject to conditions) and the principal amount repaid on a home loan is eligible for deductions under Section 80C up to a maximum limit of Rs. 1.5 Lakh per financial year. This is part of the overall deduction limit under Section 80C, which includes other eligible investments and expenditures. Additional deduction towards interest paid on loan is also available u/s 80EE upto Rs. 50,000/- provided the loan is sanctioned between 01.04.2016 and 31.03.2017 and subject to fulfilling other conditions. Also, deduction towards interest paid on loan is available u/s 80 EEA upto Rs. 1,50,000/- (to assessees who are not eligible u/s 80EE) provided the loan is sanctioned between 01.04.2019 and 31.03.2022 and subject to fulfilling other conditions.
• Education Loan: Interest paid on education loans for higher education is eligible for full deduction under Section 80E of the Income Tax Act. There is no maximum limit on this deduction, and it can be claimed for a maximum of 8 years or until the interest is fully repaid, whichever is earlier.

Choosing the Right Banking Instrument

Selecting the right banking instrument for tax-saving purposes depends on your financial goals, risk tolerance, and liquidity needs. Take into account the following aspects before arriving at your choice:

• Lock-in Period: Ensure that you are comfortable with the lock-in period associated with the chosen instrument. Tax-saving FDs and SCSS have relatively longer lock-in periods compared to other tax-saving options.
• Risk Tolerance: Banking instruments are generally considered safe, but they offer lower returns compared to equity-based options like ELSS. Evaluate your comfort with risk and your investment time horizon before making a choice.
• Interest Rates: Compare interest rates offered by different banks for tax-saving FDs and SCSS. Even a small difference in interest rates can significantly impact your returns over time.
• Liquidity Needs: Consider your liquidity requirements. Tax-saving FDs and SCSS may not be suitable if you anticipate needing access to your funds before the lock-in period ends.
• Tax Bracket: Assess your income tax bracket to determine the amount of tax advantages you may obtain from these investments.

Saving on taxes is not just about complying with the law but also about optimizing your finances for a secure future. Financial and banking instruments as mentioned above, offer a stable and secure way to reduce your tax obligation while preserving your capital.

The above-mentioned instruments are not all that are available, and that is why doing a proper & extensive research is always a prudent step before making any investment decisions. In the end, a well-thought-out tax-saving strategy can go a long way in securing your financial future.

Visit our website, or your nearest Indian Bank branch to avail various tax saving banking instruments.

Read ‘Find the Best Avenues for Tax Savings with Indian Bank’ to know more about some of the tax saving instruments offered by Indian Bank.

Indian Bank. “Your Own Bank, Always With You”

Disclaimer: https://indianbank.in/departments/disclaimer/