10 Best Tax-Saving Instruments and Their Returns

Public Provident Funds (PPF)

Public provident fund is one of the best tax-saving instruments u/s 80C, sponsored by the Government of India. However, PPF comes with a mandatory lock-in period of 15 years. This might harm the liquidity requirements of an investor. 

The PPF interest rate earned on this tax-saving instrument is announced by the government every quarter and remains fixed for the given period. PPF forms a fixed return instrument, as it provides assured interest declared by the central government. 

A maximum of Rs. 1.5 Lakh can be invested in a PPF account in one financial year, through a lump sum or monthly investments. The entire amount can be exempted from taxation, thereby, making it one of the best tax-saving investments under Section 80C. Any interest earned on an investment amount is also not considered for tax calculations. 

Senior Citizen Savings Scheme (SCSS)

Senior Citizens Savings Scheme is also one of the best tax-saving investments u/s 80C, as it enables you to enjoy SCSS tax deduction of up to Rs. 1.5 Lakh on an investment amount. However, the eligibility criteria of this scheme are more rigid than other instruments.

Only people satisfying the following criteria can avail of this investment tool:

• Individuals aged 60 years and above
• Individuals  above the age of 55 years availing voluntary retirement
• Any individual above the age of 50 years employed in the defence sector of India  

The total amount that can be invested in an SCSS policy is Rs. 15 Lakh. The interest rate payable on an investment amount is determined by the Central Government of India and, therefore, poses as a stable return on investment. 

Sukanya Samriddhi Yojna (SSY)

Sukanya Samriddhi Yojna poses as one of the best ways to save tax under section 80C of the Income Tax Act. The SSY tax benefits amount up to Rs. 1.5 Lakh per annum. However, an account under the Suaknya Samriddhi Yojna can only be opened by a person who has a daughter who is less than ten years old. 

As a part of the ‘Beti Bachao Beti Padhao’ policy, the interest rate provided by the government on this amount is higher than other government-mandated instruments such as the Public Provident Fund. Any investment that is higher than Rs. 1.5 Lakh in a year is not considered for SSY tax benefits. 

Tax Saver Fixed Deposit (FD)

Fixed deposits with a lock-in maturity period of five years are eligible for tax exemptions under Section 80C. It is one of the popular investment tools among risk-averse individuals, as it assures guaranteed returns at a fixed interest rate. 

However, it should be kept in mind that any premature withdrawals nullify any tax benefit on such investments. Interest earned under this scheme is taxable. 

National Pension Scheme (NPS)

National Pension Scheme is a systematic investment policy aiming to provide financial security to investors on retirement. It is one of the best tax-saving investments under Section 80C, with a claim deduction of up to Rs. 1.5 Lakh on the total principal amount. The national pension scheme accepts funds from both employers and employees in the case of salaried individuals. 

Under Section 80CCD (1), a tax-free investment can be made by an employee up to 10% of his/her salary. For self-employed individuals, NPS tax benefits of an additional Rs. 50,000 can be claimed under Section 80CCD (1B). 

Funds invested in an NPS account can be partially reinvested in equity schemes, subject to the discretion of an investor. 

National Savings Certificates (NSC) 

National savings certificate aim to provide secure investment to individuals wary of stock market fluctuations. The tax-saving benefits under this policy are immense, with exemptions of up to Rs. 1.5 Lakh on the principal amount and the reinvested interest amount.

The maturity period on this investment remains fixed at five years and ten years, and is up to an investor to choose between any of the two periods. 

Unit Linked Insurance Plans (ULIP)

Unit-linked insurance plans are also one of the best tax-saving investments under Section 80C available in the market, with exemptions on both investment and premium amounts payable.

The portion of money dedicated towards the investment part under this scheme is entitled to tax redemption of Rs. 1.5 Lakh, along with 10% of the total premium (provided the value is less than Rs. 1.5 Lakh). 

Life Insurance

Under section 80C, a premium paid on a life insurance policy is deductible under the income tax calculations.  The total amount allocated towards premium payments should not exceed Rs. 1.5 Lakh to avail of this tax exemption benefit

Comparison Of Various Tax Saving Instruments 

All these tools aim to provide tax exemptions to investors. However, the returns remain fixed under all instruments except the ELSS plan, as it is market-oriented.

Tax-saving ELSS funds offer the highest returns as its portfolio primarily comprises equity-oriented schemes. It comes with a mandatory lock-in period of three years, giving it enough exposure to the stock market to realize substantial profits. 

Conclusion

While there are multiple ways you can save tax, it is wise to select an option that offers you dual benefits of tax saving as well as wealth creation. Remember to plan your taxes in advance, seek the best way to optimize your taxes, and utilize the tax exemption limit completely.

Happy Investing! 

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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Research Analyst - Aakash Baid