An expert lists tax-saving investment options for you

Investments with good returns are ideally what investors look for when choosing an investment instrument. But wouldn’t it be great if your investments also had the added benefit of saving tax? But is that even an option?

Yes! Under Section 80C, which highlights “investment deductions,” investors can reduce their taxable income by making tax-saving investments or incurring qualifying expenses. This section allows a maximum deduction of Rs 1.5 lakh from the investor’s total income per annum.

The next question that arises is, where to invest?

We’ve got it all sorted for you. Archit Gupta, Founder and CEO of Clear Tax helped Business Today compile a list of investment options, which give investors the added benefit of saving tax.

1. Tax-saving fixed deposits

Tax-saving FDs are like regular fixed deposits but come with a 5-year lock-up period and tax relief under Section 80C on investments up to Rs 1.5 lakh.

Eligibility: Can be opened by resident Indian individuals.

Liquidity: Fixed deposits have a blocking period of 5 years.

Interest rate: The interest rate of FD in different banks varies from 5.5% to 7.75%.

Investment limit: The minimum investment limit is Rs 1000.

Tax treatment: Interest earned is taxable.

2. Public Provident Funds (PPF)

Investments in the Public Provident Fund (PPF) are long-term investments backed by the Government of India. Deposits made to a PPF account are eligible for tax deductions under Section 80C.

Eligibility: Can be opened by resident Indians, employees and non-employees. A HUF cannot open a PPF account.

Liquidity: PPF accounts have a lock-up period of 15 years, but can be extended for 5 years. Partial withdrawals are allowed after 7 years.

Interest rate: The current interest rate is 7.1% per annum

Investment limit: The minimum and maximum investment limit is Rs 500 and Rs 1.5 lakh respectively.

Tax treatment: Interest earned is tax exempt.

3. Employees’ Provident Fund (EPF)

The EPF is a pension scheme open to all employees. This amounts to 12 per cent of the base salary + DA, deducted by an employer and paid to the EPF or other recognized provident funds.

Eligibility: Can be opened by an employee whose base salary is greater than 15,000/month.

Liquidity: Can withdraw PF balance 2 months after leaving employment and not return to employment within 2 months with an employer covered by PF law.

Interest rate: The EPF interest rate is 8.5% for the 2020-21 financial year.

Investment limit: Both employer and employee must contribute at least 12% of base salary + AD

Tax treatment: The entire PF balance (including interest) is tax exempt if withdrawn after 5 years of continuous service. However, if the EPF/VPF contribution is more than Rs. 2.5 lakh each year, the interest earned on this excess contribution is now taxable, however, the limit is increased to Rs 5 lakh where the employer has not contributed to the fund (i.e. for government employees).

4. National Pension System (NPS)

The NPS is a pension scheme that was launched by the Indian government to provide the unorganized sector and working professionals with a pension after retirement. Investments up to Rs 1.5 lakh can be used to avail tax deductions under Section 80C. An additional deduction of Rs 50,000 is available for NPS contribution beyond the Section 80C limit of Rs 1.5 lakh.

Eligibility: Can be opened by any Indian citizen between the ages of 18 and 60.

Liquidity: Partial withdrawals are authorized after 10 years but under specific conditions.

Return rate : The return rate on the NPS varies between 12% and 14%.

Investment limit: No limit on the maximum contribution.

Tax treatment: Employer contributions are tax exempt, subject to 10 per cent of base salary and dearness allowance (14 per cent in the case of central/state government employees).

5. Unit-linked insurance schemes (ULIP)

ULIPs are a mixture of insurance and investment. Part of the amount invested in ULIPs is used to provide insurance and the rest of the amount is invested in stock markets. Investments up to Rs 1.5 lakh in ULIPs are eligible for tax relief under Section 80C.

Eligibility: An investor can buy ULIP for himself, his spouse or his child.

Liquidity: The interest rate varies because it is linked to the market.

Return rate : The return rate on the ULIP varies between 12% and 14%.

Investment limit: No limit on the maximum contribution.

Tax treatment: Investments, withdrawals and amounts at maturity are tax-free. But if the annual premium exceeds Rs 2.5 lakh in any year during the term of the policy, the proceeds of these ULIPs will be taxable.

6. Sukanya Samriddhi Yojana

Sukanya Samriddhi Yojana/Scheme is one of the most popular programs of Indian government. The program aims at the betterment of girls in the country

Eligibility: Parents/guardians can open an account in a girl’s name until she turns 10

Liquidity: Up to 50% of the deposit amount can be withdrawn early once the girl turns 18.

Interest rate: The interest rate on Sukanya Samriddhi Yojana is 7.6%

Investment limit: Investment is limited to a maximum of Rs 1,50,000 per financial year

Tax treatment: Investments, withdrawals and amounts at maturity are tax free

To read also: Should you repay your mortgage in advance or invest your surplus money? Here’s what the experts say

Also read: Stocks, real estate, gold, FD: Here’s how to invest Rs 1 crore in this market

Dorothy H. Lewis