When the financial year is near its end when we all become strangely active and start planning for investing in tax saving instruments but this doesn’t leave much room for a prudent instrument planning. These days, there is the much best investment plan to make your way around the tax wrap and enjoy the maximum saving possible. To start investing in the early quarters of the financial year you need a smarter approach so that you get time to prudently plan how to get most of your tax saving investment options.
Never choose investment plan just for the sake of availing tax benefits. Ideally, an investor should look out for 4 factors while making tax saving investments.
- Minimum risk
- Maximum tax savings
- Low cost of investment
- Substantial returns
There are a very few investment avenues that provide further tax deductions, over and above this limit. Let’s get on to the 5 best tax-saving investment options.
- Health Insurance
As Health insurance plan offers no perky returns, some of you might not agree with it being counted as a tax saving investments option. But, might we mention, the value you get from health insurance coverage makes it much more worth than any other form of investment.
As per section 80D, you get to enjoy a tax deduction on the premium that you pay for the health insurance plan. The upper cap for this deduction is Rs 15,000 and is extendable up to Rs 20,000 for senior citizens and in case a person gets a health plan for himself and for his parents, he can enjoy a deduction of up to Rs 35,000 on his taxable income. However, section 80D is not applicable to the group health insurance given by your employer.
- Life insurance
Life Insurance offers its dual edged benefits; it makes it to the top of our list as an investment plan. It gets you a life cover that acts as a financial cushion in case of a contingency. The life insurance plan is deductible from your total income, thus lowering your taxable fraction, under section 80C of income tax. The upper limit for this deduction is Rs 1 Lakh. Even the more evolved forms of life insurance save the tax for the investor under different sections. The premiums paid for ULIPs (Unit Linked Insurance Plans) are exempted from taxes under section 80C.
But this is not all, under section 10(10D), the lump sum that is paid to the beneficiary in case of an eventuality is not taxable. If it’s a pension plan, the 1/3rd maturity amount paid out a lump sum is not taxable. Though, the rest 2/3rd fraction paid out as the annuity is taxable.
There are several life insurance plans available in the market, namely:
- Term Plans
- Endowment Plans
- Unit Linked Insurance Plans or ULIPs
- Money Back Plans
- ELSS Mutual Funds
Equity Linked Saving Scheme (ELSS) Mutual Funds is also an investment plan that are specially designed for tax saving purposes and are considered one of the most sought-after tax saving investments options. Being market linked product they are high risk products but also offers the potential of high returns. We have already counted it above among the investments that save taxes under section 80C. There are two reasons why it makes to our list with flying marks.
It is one of the two tax saving investments options that are equity based (the other one is ULIP)
There’s one more perk that ELSS offers that you can make the investment in an ELSS can also be made through a SIP (Systematic Investment Plan) wherein you get to spend a small fixed fraction every month instead of paying a heavier sum altogether. ELSS invested through a SIP makes the overall investment easy and affordable and it can multiplies the money better than other forms of investment through effect of averaging and the power of compounding.
- Public Provident Fund
Under section 80C, it is a long-term saving scheme issued by the Central Government. The contribution made towards PPF is tax deductible. Rs 70,000 is the upper limit on its contribution. Moreover, the interest earned and received at the maturity is absolutely tax-free. Such unique benefits make PPF the best tax saving investments options of all the time. The only glitch to PPF is that it sets a lock-in period of 15 years, so it is not good for those looking for a short-term tax-saving investment.
NSC (National Saving Certificate) has all the features as a PPF has. It yields optimal guaranteed returns and saves tax under section 80C. But the reason NSC didn’t make it to our list is that unlike PPF, the interest received in former at maturity is taxable.
We would like to drive your attention to one more financial instrument here – Loan application. Yes, we know loan is not a form of investment but it is a very efficient tax saving instrument. Here’s how, as per section 80E of the Income Tax act, the interest component of the repayment on the higher education loan is tax deductible. Under section 80C, the monthly Home Loan EMI made towards the principal component of the loan is exempted from taxation and most importantly under Section 24; the interest on the home loan is also exempted from tax.
- National Pension Scheme
NPS is one of the very few tax saving investment plan that let the investor surpass the 1 lakh limit of deduction set by the section 80C. Under NPS, the percentage of the basic salary (up to a max of 10%) that your employer contributes towards your NPS is tax deductible. Your contribution towards National Pension Software will still be governed by the section 80C, hence; will abide by the 1 lakh limit.