Paying hefty taxes can be mentally taxing. With tax-free investments, you secure your future as well as you reduce your tax liabilities.
But how to do all of that?
Here's a quick guide of all the tax-free investments.
Equity-Linked Saving Schemes (ELSS) are tax-saving equity mutual fund schemes with a three-year lock-in period. Investments in ELSS mutual funds up to ₹1.5 lakhs are exempt from income tax. They offer potential returns based on equity market performance, which can be volatile in the short term but tend to beat inflation in the long run. You can choose between dividend or growth payout options, with the latter being more tax-effective since dividends are now taxable.
As a beginner, you might need help understanding the stock market. But ELSS funds are managed, tracked and rebalanced by professionals known as fund managers, so you don’t have to worry about it.
The National Pension Scheme (NPS) is regulated by the PFRDA and designed for retirement planning. Indian citizens aged 18 to 60 can participate with low fund management charges.
NPS offers three asset profiles: Equity (E), Corporate bonds (C), and Government securities (G). The maximum equity investment is 75%. Contributions up to ₹1.5 lakh receive income tax exemption under section 80CCD (1B), with an additional ₹50,000 deduction. 40% of the redemption amount is tax-exempt at maturity, with mandatory annuity investment for monthly income.
NPS acts as a flexible, transparent, and safe tax saving investment tool, with a minimum investment of ₹500. It suits investors of all risk appetites.
PPF is a government-sponsored retirement scheme with tax exemptions. It benefits freelancers, contractors, and entrepreneurs without employer-provided pensions. The minimum investment is ₹500 annually, while the maximum is ₹1.5 lakh. You can invest monthly or as a lump sum. Failure to invest the minimum amount incurs penalties. Interest rates, currently 7.1%, are determined by the government and compounded annually.
PPF offers triple tax exemption on the principal, interest, and withdrawals and suits risk-averse investors with a long-term horizon.
NSC is a fixed-income tax-saving investment scheme available at post offices. It offers a safe investment backed by the Central Government. Investments up to ₹1.5 lakh in a financial year are tax-exempt. Interest is compounded annually and added to the principal. In the second year, you can claim a tax deduction on the new investment and previous year's interest. Maturity proceeds from NSC are taxable. It suits risk-averse investors with a medium-term horizon.
Investments in tax-saving bank fixed deposits with a tenure of five years are tax-exempt up to a maximum limit of ₹1.5 lakhs under section 80C of the Income Tax Act. The bank sets the interest rate on the fixed deposit scheme and may review and update the same every quarter. You may invest in the tax-saving fixed deposit as a one-time lump sum investment. Premature withdrawal is not allowed.
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In conclusion, tax-free investments offer a valuable opportunity to secure one's financial future while minimizing tax liabilities. Tax-saving options, such as ELSS, NPS, PPF, NSC, and Bank Fixed Deposit Scheme, cater to various risk appetites and investment horizons. By making informed choices and utilizing these tax-saving tools, individuals can alleviate the mental burden of paying hefty taxes and work towards building a more financially stable and secure future.
You may invest in one of the tax-saving schemes to avoid paying taxes. These schemes provide income tax exemptions on investment amounts up to a specified limit per financial year.
A tax-free retirement account or TFRA is a type of long-term investment plan that’s designed to help minimise taxes on retirement income.
The amount invested in these schemes is exempted from income tax up to a specified limit per financial year: Life Insurance, PPF, NPS, Pension, Deposits and SCSS (Senior Citizens Saving Schemes).
