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Tax Saving Investments

Nikhila Sastry

10 Sept 2020



"In any investment, you expect to have fun and make money" - Michael Jordan

Well, we couldn't agree more. Wouldn't it be fun if you could not only save tax but also generate tax-free income while doing the same?

Taxes are infamous for burning a hole in your pocket. But worry not. There are many investment options that the government provides to help us refill our pockets with great returns up to a specific limit.

In this post, we will talk more about:

Before we dive into the tax-saving options, let's understand the 3 types of tax exemptions available.

i. EEE Investment: EEE stands for Exempt, Exempt, Exempt.

ii. EET Investment: EET stands for Exempt, Exempt, Taxable.

iii. ETE Investment: ETE stands for Exempt, Taxable, Exempt

As a rule of thumb, it's easier to understand that the three exempted/taxable components correspond to investment amount, interest, and income generated on the investment at the time of withdrawal respectively.

1. Equity Linked Savings Scheme ( ELSS )

Equity Linked Savings Scheme is a diversified equity mutual fund. It falls under the EET investment category.

All the Mutual Fund Houses offer these schemes with the tag "Tax Saving" to distinguish them from other Mutual Fund schemes. Returns on ELSS are variable.

The salient features of ELSS are enumerated below.

  • Tax benefits under Section 80C up to a limit of Rs. 1.5 lakh per year

  • Lock-in period of 3 years

  • 10% Tax LTCG (Long-term Capital Gains) on the transfer of equity (with exposure of 65% in Equity) only if Gains are greater than Rs. 1 lakh per annum Note: LTCG made till Jan 31st, 2018 remains tax-exempt

Suitable for: Those willing to invest in equity markets and have the appetite to take moderate risks for an inflation-adjusted high target amount. ELSS also helps save for retirement.

2. Public Provident Fund ( PPF )

The Public Provident Fund has been the most popular savings avenue for decades and still stands tall as one of the best tax-saving investments.

There is a myriad of benefits of a PPF as a long-term investment. Let's look at the most prominent features of a PPF.

  • EEE investment with 7.9% IR per annum (changes every 3 months)

  • 15-year old scheme and can be extended indefinitely in blocks of 5 years

  • Open a PPF account in one's name or in the name of a minor child as a guardian

  • Rs. 500 is the minimum annual amount required to keep the account active

  • Rs. 15 lakh in a financial year is the maximum amount that can be deposited

Suitable for: Anyone looking for long-term investments with a sovereign guarantee with tax-free returns.

3. Employees' Provident Fund ( EPF )

Employees' Provident Fund helps salaried individuals save tax as well as generate a tax-free corpus. Here are its salient features:

  • 12 percent of one's basic salary is allocated to EPF by employer

  • Tax exemption under Section 80C up to a limit of Rs. 1.5 lakh per annum

  • EEE investment with 8.5% IR p.a. currently (subject to change annually)

  • If 100% of Basic plus DA is contributed, then EPF becomes a Voluntary Provident Fund which remains a part of it

Suitable for: Any salaried employee.

4. Unit Linked Insurance Plan ( ULIP )

Unit Linked Insurance Product is a blend of protection and savings. It not just provides life insurance and cover but also channels one's portfolio into market-linked assets.

  • Duration of the fund is 15 to 20 years

  • Lock-in period of 5 years

  • 12 to 14% returns expected

  • Varying asset allocation in debt and equity

  • Life cover plus investment benefits

Suitable for: Anyone who is looking for a combo of protection of insurance and returns of equity investments. If one has invested in ELSS and term insurance policies, then ULIP is redundant.

5. National Pension Scheme ( NPS )

National Pension Scheme is a government-sponsored pension scheme launched in January 2004 by the government. The salient features are as follows:

  • Allows regular contribution to a pension account

  • EET investment with expected returns of 5-20%

  • Part of the corpus is withdrawn in lumpsum

  • Either 40% or 100% of the corpus invested in the annuity

  • Expected returns from the annuity are 3% to 10%

Suitable for: Those who want to accumulate retirement corpus.

6. National Savings Certificate ( NSC )

National Savings Certificate is a government-sponsored investment scheme primarily used for small savings and income tax savings in India. The salient features are as follows:

  • Amounts invested in multiples of Rs. 100, 500, 1000, 5000 & 10000.

  • ETE investment

  • Premature withdrawal not accepted except for death or court order

Suitable for: Risk-averse individuals.

7. Sukanya Samriddhi Yojana ( SSY )

Sukanya Samriddhi Yojana is a Government of India-backed saving scheme targeted at the parents of a girl.

The scheme encourages parents to build a fund for future education and marriage expenses for their female child less than 10 years of age. The salient features are:

  • EEE investment eligible for deduction under 80C

  • Partial withdrawal allowed up to 50% after girl child attains 18 years of age

  • Minimum investment of Rs. 1000 and a maximum of Rs. 1.5 lakh every year

  • Maturity upon the girl turning 21 years or the wedding (whichever is earlier)

  • Maximum of 2 accounts held by a Guardian

Other investments like Senior Citizen's Savings Scheme (SCSS), 5-year Fixed Deposits, etc are other investment options that can help save tax.

Well, we can't agree more. If you are of the same sentiment, you're in the good company of Albert Einstein.

But worry not! All it takes is smart planning and timely investments to save yourself from paying more tax than you should.

Plan your finances on MoneyPlanned and stay peaceful.

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