Best Tax Saving Investment Option in India

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Best Tax Saving Investment Option in India

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If you Google “tax-saving investment” or “tax-saving investments in India”, you might come across articles describing the best tax-saving investments to help you save taxes and build wealth simultaneously. These buy-one-get-one-free or dual benefits on your investments can help you save taxes and build wealth for a long-term financial goal at the same time. 

But which tax-saving investment can offer you this feature?   

What are tax-saving investments? 

As per Section 80C of the Income Tax Act, you can save up to ₹1.5 lakh every financial year from your taxes by investing in a tax-saving investment. These are long-term investments with varying levels of risk and returns. The types of tax-saving investments as per 80C are as follows: 

1. Public Provident Fund (PPF)

You can save taxes on up to ₹1.5 lakh by investing in PPF. Investments made in PPF come under the EEE category. It means that the investment, interest and maturity amount are all exempted from taxes. 

The maturity period for PPF is 15 years from its start date. After 15 years, your investment matures, and you receive your principal amount and the annual compounded interest. Premature withdrawal is not allowed in a tax-saving PPF investment.

The current interest rate for PPF investment is 7.1 per cent (as of July 2022). PPF is a low-risk investment with a very long-term horizon. You can regularly invest in a PPF that continues till the maturity of the fund.

2. Fixed Deposit (five years tenure) 

A fixed deposit of five years maturity is also a tax-saving investment under 80C through which you can save taxes up to ₹1.5 lakh every financial year. Interests earned in a tax-saving fixed deposit are added to the income of the investor and are taxed according to their income tax slabs. The interest rates for fixed deposits are different for different banks. 

Like tax-saving PPF, premature withdrawal is not allowed in a tax-saving fixed deposit. You can invest in these fixed deposits through a bank or post office. Additionally, the risk profile of fixed deposits is low. However, you cannot make regular investments in a fixed deposit. You need to open a new fixed deposit every time you wish to invest. 

3. National Savings Certificate (NSC)

NSC is a tax-saving investment that can be made through post offices. These are investments in debt assets and are low-risk in nature. They have a maturity period of five years, where no regular investments are allowed. When you invest in NSC, you get an NSC investment certificate. For investing every time in an NSC, you need to make new investments. 

Your investments up to ₹1.5 lakh annually are exempted from tax in an NSC. This interest is compounded annually and is taxable as “income from other sources”. Once matured, you get your principal amount and the compounded interest for five years. The current interest rate for NSC is 6.8% (on July 2022).

4. Equity Linked Savings Scheme (ELSS)

ELSS is a tax-saving investment under 80C that allows you to save taxes through mutual funds. These are equity-based mutual funds with a maturity period of three years. These investments can help you invest in regular instalments through SIP (systematic Investment Plan) and lump sums. 

Unlike the PPF, where your entire investment amount matures after 15 years, in ELSS, each investment has to complete the maturity period separately. For example, a SIP made in April 2022 will mature in April 2025. Similarly, a SIP made in May 2022 will mature in May 2025. The returns from these investments are taxable under the Long Term Capital Gains (LTCG) tax. ELSS is the only tax-saving mutual fund in India and offers various benefits. 

Let’s learn about ELSS in detail. 

What are the benefits of investing in ELSS? 

1) Regular investments 

With ELSS, you can invest to save taxes by dividing your investments into smaller instalments. Thus, you do not have to face the burden of investing a lump sum of ₹1.5 lakh for the year in one go. 

You can divide your investment into 12 or more SIPs to help you fill your tax-saving kitty slowly and regularly. You can invest in an ELSS scheme through the Fi money app. You just need to choose a fund and set up instructions to deduct your preferred amount every month at your preferred date using FIT rules. 

2) Equity investments 

ELSS is the only tax-saving investment that invests in equities. Therefore, these investments can also help you diversify your portfolio if you are already investing in debt products. With equities comes the potential for higher long-term returns. Therefore, these investments can be suitable for your long-term goals. 

3) BOGO on your goals

By investing ₹1.5 lakh in ELSS, you saved taxes for the financial year. But when your tax-saving goal is fulfilled after the three years of maturity, what do you do with these investments? With ELSS, you can hit two birds with one stone. You can save taxes as you invest for your long-term goals like retirement planning. Therefore, ELSS can be one of the best tax-saving investment options for dual-goal planning. 

4) Professional management 

ELSS is an actively managed mutual fund. This means these investments are tracked and rebalanced by a fund manager through thorough research from time to time. However, as per the new SEBI rules, these funds are now allowed to be passively managed as well. Like any other mutual fund, these funds are professionally managed by the fund managers. This can ensure that your investments are designed to give you inflation-beating returns in the long run. 

To conclude 

Investing in ELSS offers you the dual benefits of investing in your long-term financial goals and saving taxes. These funds can help you diversify your debt portfolio and invest systematically through small, regular SIPs. However, it is essential to be aware of the high risk associated with equity mutual funds and stay invested for the long run to manage it. 

Frequently asked questions

1. How can I reduce my taxable income? 

You can reduce your taxable income by investing in tax-saving investments. With tax-saving investments, you can save taxes up to ₹2 lakhs (₹1.5 lakh + ₹50,000). You can save up to ₹1.5 lakh through tax-saving investments in PPF, NSC, five-year fixed deposits or ELSS. These are tax-saving investments under section 80C of the income tax act. 

Other than these, you can invest in the National Pension Scheme (NPS), a tier-one investment to save additional taxes up to ₹50,000 per annum. NPS is a tax-saving investment under section 80 CCE of the income tax act. 

2. What income is tax-free? 

Income tax is applicable per the income tax slabs prescribed by the government every year through the union budget. At present (July 2022), if your total income for the financial year is less than ₹3 lakhs, it will be considered tax-free. However, if your income goes above ₹3 lakhs by up to ₹2 lakhs, you can still save taxes by investing in tax-saving investments under section 80C and Section 80CCE of the income tax act. 

3. What salary is tax-free in India? 

If your total income from all the sources is up to ₹3 lakhs in a year, you will not have to pay any income tax for them. If your income crosses ₹3 lakhs by anything up to ₹2 lakhs, you can still be free from paying the income tax if you invest in tax-saving investments under section 80C and section 80CCE of the income tax act. 

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