Top 5 Tax-Saving Schemes in India: ELSS, PPF & More

2023-03-08

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For the majority, the payment of taxes is seen as a difficult and tiresome process. After all, who likes deductions from their salary? Also, saving for your long-term goals is important.

Thus, the Income Tax Act in India has allowed tax deductions on certain investments.

So, if you want to invest, it will not only help you achieve your goal, but it will also help you reduce the amount of tax you must pay.

Many investments are eligible for tax-deduction u/s 80C of the Income Tax Act 196. Here are the five best tax-saving schemes in India that will help you achieve your goals while also saving you money:

1. Public Provident Fund (PPF)

If safety and stability are the first words that come to your mind while thinking about investing, then PPF will be the perfect choice for you. This is one of the oldest and most trusted tax saving schemes in India.

You can open a PPF account with any of the banks or the post office. Being backed by the government, it offers a guarantee of returns.

Tax-Benefit

PPF is one of the investments that fall under the EEE category (exempt-exempt-exempt). This means that the PPF is tax-free at all 3 stages: deposit, interest, and maturity.

Here are some other features:

The current rate of interest offered under PPF is 7.1% p.a.
The duration of PPF is 15 years.
You can invest up to Rs 1.5 lakh every year.
To start your account, an investment of at least Rs 500 is required.

2. National Pension Scheme (NPS)

NPS is an advanced, market-linked retirement savings plan. The NPS blends the features of retirement saving schemes like EPF with the market portfolio. You can link your NPS account with your income for a growing investment towards retirement.

The amount you invest in this scheme is invested in market securities such as equity, debt, etc. NPS aims to provide you with a sufficient corpus that you can use after retirement. This plan matures after you retire, at the age of 60.

Tax-Benefits

This type of investment is eligible for tax deduction u/s 80C and 80CCD of the Income Tax Act 1961.

a) You can invest with the help of two options

Auto
Active

b) You are given the freedom to choose the securities in which you want to invest and how much. The funds are divided into the following categories

E Class- Equity
C Class- Fixed Income Instruments
G Class- Government securities

c) NPS allows you to withdraw a maximum of 60% of your funds in a lump sum. 40% is to be invested in the PFRDA notified pension (annuity) schemes

The NPS allows premature withdrawals in the case of a financial emergency or a major life goal. For example, you can withdraw funds from NPS for the higher education of your child and marriage of your daughter, home purchase or construction, or treatment of specified diseases.

3. Equity-Linked Savings Scheme (ELSS)

This is a type of mutual fund in which equity makes up a major part of the portfolio. At least 65% of the funds in ELSS are invested in equity stocks and securities. Due to the returns of ELSS being linked with the performance of the equity market, it has a slightly higher risk involved. But due to this high risk, it also has the potential to get you higher returns. This quality is helpful in the long run and can help you generate good wealth.

reasons-to-buy-elss-as-a-tax-saving-scheme

Tax-Benefits

ELSS funds are the only mutual funds that are eligible for a tax deduction. You can claim a tax deduction of up to Rs 1.5 lakhs u/s 80C on the amount that you invest.

However, long-term capital gain tax (LTCG) can be levied on the returns you earn if they exceed ₹ 1.25 lakh.

There is a lock-in period of 3 years. During this time, you may not withdraw your investments.
You can start investing in the ELSS fund with an amount as low as Rs 500.
There is no upper limit to investment. You can invest according to your capability.
ELSS can give you good returns if you hold them for a long time.

4. Unit Linked Insurance Plan (ULIP)

ULIPs are a type of life insurance product that, apart from providing you with life coverage, also allows you to invest in the market and build your wealth. With ULIP, you get insurance and investment in a single investment option.

ULIP works best to achieve your goals that have a long-term horizon in mind.

Tax-Benefits

Tax deductions of up to Rs 1.5 lakh u/s 80C are available under ULIPs. The maturity amount can also be tax-exempt u/s 10(10)D of the Income Tax Act 1961.

ULIPs involve both a death benefit and a maturity benefit. It builds cash value over time.
You can invest in multiple funds as per your preference.
- Equity Funds
- Debt Funds
- Hybrid Funds
There is a lock-in period of five years. Partial withdrawals are allowed after this period.

5. Life Insurance Plans

Life Insurance Plans are still the most popular tax-saving investment in India. Life insurance plans offer to cover your life financially in return for regular premiums.

There are many types of life insurance plans, each serving a different purpose. These are also called "traditional life insurance plans."

a) Term Life Insurance

Term life insurance is the simplest and most affordable form of all the life insurance variants. A term plan offers to cover your life for a specific period or a term. It involves only the death benefit.

Also Read : What is Term Insurance

b) Endowment Plan

With this type of life insurance, you get financial coverage as well as a maturity benefit. An endowment plan helps you build a savings habit and create a good corpus for yourself. This involves both death and maturity benefits.

c) Money-Back Plan

In a money-back plan, regular payments are made to you at specific intervals. While the other life insurance policies give you benefits only after the policy term matures, money-back plans you get money when the policy is still running.

5 Best Tax Saving Schemes At A Glance

BASIS	PPF	NPS	ELSS	ULIP	LIFE INSURANCE
Term	15 Years	Up to 70 years of age	3+ years	5+ years	5-40 years
Risk	Low	Medium to high	High	Medium to high	Low
Fixed Return	Yes. 7.1% per annum*	Varies with market	Varies with market	Varies with market	Yes
Death Benefit	No	No	No	Yes	Yes
Deduction on Investment	1.5 lakhs	Up to 2 lakhs	1.5 lakhs	1.5 lakhs	1.5 lakhs
Max Annual Tax-Free Investment	1.5 lakhs	10% of Salary or 20% of business income	No Limit	2.5 lakhs	No Limit
Tax on Withdrawals	Nil	Nil if within limit#	Taxable if Capital Gain exceeds ₹ 1.25 lakh	Nil	Not Available
Tax on Maturity	Nil	Nil if within limit#	Taxable if Capital Gain exceeds ₹ 1.25 lakh	Nil	Nil

* Subject to annual revisions by Central Govt based on market conditions

# If withdrawing before 60 up to 80% of the corpus should go to an annuity plan. After 60 this limit is 40%. Before 60 withdrawals are possible within limits for life goals like a child’s education, the marriage of a daughter, home purchase and medical treatment for specified diseases.

At the end of the day, the tax-saving ability of an investment is only a single parameter. There are other vital factors that you should look into while investing. Remember that tax saving is temporary while investment is permanent.

Also Read : Income Tax Slab

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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