People seek investment options that provide them with good financial returns.
With the start of every new financial year, both salaried and non-salaried taxpayers start on comparing the tax saving investment options.
There will be 2 points in time when you would be able save your tax:
When you invest a certain amount, Income Tax department will provide you deduction for that amount from your Income so that you save tax on that Investment. But such Deduction usually has a certain limit. For example you can get Deduction of 1.5 Lakhs per annum under section 80C of income tax.
At the time of maturity of that investments you may get tax exemption on the interests or returns earned. Usually, this does not have any limits for even if you get millions in interest, all will be yours.
One more important basic will be if you are planning for a short term investment (say >2years) then, stay at point no. 1 and if you are planning on long term then go for savings on Point no 2.
With this, now you can make maximum out of the following list of tax free investments.
1) Public Provident Fund (PPF)
- PPF offers 8.7% interest per annum. Government of India keeps on updating this every year. But due to today’s stable mode of economy, it is decided to keep it around 8% and won’t fluctuate it much.
- PPF offers tax free returns on maturity.
- PPF has lock-in period of 15 years. But you can withdraw your money from the 6th year.
2) ELSS (Equity Linked savings Schemes) Tax Saving Mutual Funds
- ELSS offers highest returns (like 15% to 25% but not fixed and not guaranteed, depends on market) compared to other tax saving options.
- ELSS has lowest lock-in period i.e. of 3 years.
- Investors can opt for dividend option and get regular income even during the lock-in period.
- Investing in ELSS funds through SIP every month would help you reduce burden of investing a lump sum thus taking care of market fluctuations and provide higher returns.
- From 1st April 2018 , a new long-term capital gains tax will be imposed on ELSS funds, according to the 2018 Budget proposals.
- Some of the top ELSS tax saving mutual funds are Reliance Tax Saver fund, ICICI Prudential Tax Plan, Franklin India Tax Shield fund etc.
3) Tax Saving Bank FD Schemes
- FDs are a very good option to save income tax under section 80C of IT act.
- Interest rates on a bank FD vary between 7% to 8% per annum.
- Interest on FD is taxable. So, no saving at the time of returns.
- FDs have a minimum 5 Years Lock-in period.
4) Voluntary Provident Fund (VPF)
- Voluntary provident fund is the contribution from employee to his PF account. This is beyond the employee EPF contribution of 12%.The maximum amount an employee can contribute is 100% of the Basic and DA.
- This would carry the same rate of interest as of the employee Provident Fund (EPF). Read more about The current EPF rate of interest is 8.5% per annum.
- Investment in VPF can be withdrawn only during retirement, hence it is one of the best tax saving options to save income tax.
- Maturity returns in VPF are tax free.
5) New Pension Scheme (NPS)
- NPS is for those investors who are looking to save their money for retirement.
- NPS returns vary between 4% to 10%. In 2013, some of the funds opted in this scheme has provided 14% returns.
- NPS is a very low cost investment option. The fund management charges are very low at 0.0009% of investment value.
- There is no maximum limit for investment in NPS.
- NPS allows investors to opt for allocation of equity and bonds.
- Maturity amount is taxable. So, returns are not tax free (short term benefit only).
6) National Saving Certificate (NSC)
- National Saving Certificate (NSC) is issued by Post offices in which principal along with interest is backed up by the Govt. of India. Hence, these are safe investment options.
- NSC’s are available for a 5 and 10 year periods.
- NSC’s are available for a minimum investment of Rupees .
- There is no maximum limit for the NSC investment.
- Interest rates are 8.5% per annum for the 5 year NSC (VIII) and 8.8% per annum for 10 years NSC (IX)
- Interest rates in NSC are compounded every half year.
Interest received is taxable. You need to show this as other income while filing ITR and paying income tax. However, such interest can be claimed again as exemption under section 80C of IT act.