Tax Saving Investments Plans

Key Takeaways

• Tax planning works best when investments are aligned with life stage income level and long-term financial goals

• Sections like 80C, 80D, 80CCD, and 24(b) allow individuals to reduce taxable income through approved investments and expenses

• Combining multiple tax-saving options can significantly lower tax liability without compromising liquidity or returns

• Salaried individuals, self-employed professionals, senior citizens, and business owners can all benefit from tailored tax-saving strategies

• Early and informed tax planning helps build wealth while staying fully compliant with income tax laws

Equity-Linked Saving Scheme (ELSS)

An ELSS is a tax-saving, open-ended mutual fund scheme that invests at least 80% of its assets in equities. It is one of the most effective tax-saving investments for investors with a high-risk appetite. The main incentive in an ELSS fund is the possibility of a high long-term returns due to heavy investment in equity. 

Contributions to ELSS are eligible for deductions under Section 80C, up to ₹1.5 lakh per year. The actual tax savings depend on your income tax slab; for example, an individual in the highest tax slab could save up to ₹46,800 in taxes on a ₹1.5 lakh investment. ELSS funds have a mandatory lock-in period of 3 years, the shortest among tax-saving instruments under 80C, which allows both liquidity and tax efficiency.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a long-term, market-linked retirement savings instrument that provides both tax benefits and a disciplined approach to building a retirement corpus.

• The account holder/employee’s contribution is eligible for a tax deduction under Section 80CCD(1) of the Income Tax Act. The maximum deduction that can be claimed is 10% of the salary (basic plus DA). If the investor is self-employed, deductions can be claimed for contributions up to 20% of the gross income.
• Employer’s contribution of up to 10% of salary (Basic Salary +DA) to your NPS account is exempt from your taxable income under section 80CCD (2). As per the Union Budget 2020, the amount of employer contribution to PF, NPS and superannuation fund in aggregate has been proposed to cap up to ₹ 7.5 lakh.

*Tax saving of Rs 46,800 is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on a life insurance premium of Rs.1.5 lakh, who is having taxable income up to ₹ 50 lakhs.

The aggregate amount of deductions under section 80C, section 80CCC and 80CCD (1) shall not, in any case, exceed ₹ 1.5 lakhs.

In addition to this, you can avail of a deduction for an additional contribution of up to Rs. 50,000 in NPS under section 80CCD(1B) of the Income Tax Act, 1961. This deduction is available to both salaried and self-employed investors.

However, no deduction under this sub-section shall be allowed in respect of the amount on which a deduction has been already claimed and allowed under 80CCD(1).

Unit-Linked Insurance Plan (ULIP)

ULIPs are a combination of insurance and investment. This means that the premium paid towards the policy goes partly towards life insurance and the rest is invested in diversified funds. You can invest in equity, debt, or money market funds, as per your risk appetite. These are one of the best tax-saving investments allowing you the flexibility of:

Premiums paid towards ULIPs are eligible for tax deduction under Section 80C, subject to an overall limit of ₹1.5 lakh, provided the policy conditions are met. ULIPs have a mandatory lock-in period of five years. Maturity proceeds and death benefits may be tax-exempt under Section 10(10D), subject to applicable premium and policy conditions as per current income tax rules.

Public Provident Fund (PPF)

PPF is the best tax-saving investment with a sovereign guarantee on returns. You can borrow from the fund balance starting from the third financial year of the account. After five continuous financial years of investment, you also have the option of partial withdrawals in accordance with eligibility rules.

The tax savings under PPF extend to both the returns and the interest earned on deposits. PPF falls under the Exempt-Exempt-Exempt category. Interest and maturity value are also tax-free. Thus, PPF accounts are one of the best tax-saving plans, as the account also has no maximum age for maturity.

Sukanya Samriddhi Yojana

Sukanya Samriddhi Yojana is a small savings scheme, backed and promoted by the Government of India. As a parent or legal guardian of a girl child below the age of 10, you can open a Suknya Sammriddhi Account in a post office or authorised bank in the name of the child.

The scheme aims to encourage parents to save for the education and future needs of a girl child from an early age. It also offers tax benefits in the form of the Exempt-Exempt-Exempt (EEE) category. The investments made into the scheme are eligible for deductions under Section 80C up to Rs 1.5 lakhs. The interest earned and maturity values are also tax-free under prevailing income tax laws.

National Savings Certificate (NSC)

National Savings Certificate (NSC) is a fixed-income investment scheme backed by the Government. of India. It is suitable for investors looking to invest a lump sum amount. with assured returns, as the interest rate is fixed at the time of investment and remains unchanged until maturity, does not have a maximum investment limit.

Investments made in NSC qualify for tax deduction under Section 80C up to ₹1.5 lakh in a financial year. The interest earned on NSC is taxable; however, the interest accrued for the first four years is deemed to be reinvested and is also eligible for deduction under Section 80C. The interest earned in the fifth year is taxable.

Senior Citizen Saving Scheme

Senior Citizens Savings Scheme (SCSS) is another government-backed savings instrument for Indian citizens above the age of 60 years, and for eligible retirees aged 55-60 years, subject to prescribed conditions. Aimed at providing a reliable source of regular income to senior citizens after retirement, the scheme offers quarterly interest payments.

The investments made towards SCSS can be claimed as a deduction under section 80C of the Income Tax Act. The Interest under SCSS is taxable and bank/post offices will deduct tax @10% under section 194A if annual interest exceeds ₹ 50,000. However, where the person has income below the minimum threshold limit and provides form 15H, interest can be received without a TDS deduction.

5-Year Bank Fixed Deposit

Banks and post-office provide a 5-year tax-saving fixed deposit. As per Section 194A of the Income Tax Act of 1961, the interest earned on these FDs is taxable if it crosses ₹ 5,000 (₹ 10,000 for senior citizens) mark. Often, tax is deducted at the source for the same.

However, senior citizens can use these FDs to create tax-free pension income of up to Rs 6.5 lakhs a year.

Life Insurance Policy

Life insurance plans are perhaps the best tax-saving investment options with guaranteed benefits. At the same time, the life cover enhances the financial safety of the family while you are still earning money.

The premium you pay for a life insurance plan is eligible for a deduction under Section 80C, up to Rs 1.5 lakh. The amount received on maturity or the death of the policyholder is also exempt from tax in the hands of the beneficiaries.

Pension Plans

Pension plans are annuity-based plans which help senior citizens and retiring investors invest their retirement corpus for a reliable income stream. Such plans act as a financial safeguard for individuals post-retirement. Since investment into pension plans also qualifies for tax deduction these are also the best tax-saving investments for retired investors or those close to retirement.

Pension plans from life insurers also provide pension security for your spouse with a life cover. Alternatively, you can also purchase a joint life pension plan with guaranteed pension income for life.

Health Insurance

Health insurance is a critical component of a sound financial portfolio, as medical emergencies can significantly impact financial stability. But the benefits of a health insurance policy are not just limited to this purpose. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of self, spouse, children.

An additional deduction of up to ₹25,000 is available for premiums paid for parents, which increases to ₹50,000 if the insured parents are senior citizens. Where both the taxpayer and parents are senior citizens, the maximum deduction can go up to ₹1,00,000 in a financial year.

Deduction on Preventive Healthcare Check-ups

Preventive healthcare check-ups refer to the pre-emptive measures taken to keep diseases and ailments at bay.

Deduction up to ₹ 5,000 is allowed for preventive health check-ups for self, spouse, children or parents which is a part of the overall deduction one can claim under Section 80D.

Deductions on Health Insurance Premium Paid for Parents

An individual can claim a deduction of up to ₹ 25,000 for insurance of self, spouse, and dependent children. Additionally, a deduction is allowed on the insurance of your parents as well. If parents are below 60 years of age, the deduction is capped at ₹ 25,000, whereas in case of parents aged 60 or more, the cap is at ₹ 50,000.

Deduction for Rehabilitation of Handicapped Dependent Relative

Section 80DD covers expenditure on medical treatment, rehabilitation, and training of disabled dependents. The section provides for a deduction up to ₹ 75,000 for a disability that is classified in 40%-80% range. If such dependant is a person with severe disability, deduction amount can be claimed up to ₹ 125,000.

Deduction for Medical Expenditure on Self or Dependent Relative for the Treatment of Specified Diseases under Section 80DDB

This is to be seen separately for each case.

In case of individuals and HUFs below age 60, the deduction is capped at ₹ 40,000. The amount being the expenses incurred towards the treatment of specified medical diseases or ailments for the individual or any of their dependents. For a HUF, such a deduction is available with respect to medical expenses incurred towards these prescribed ailments for any of the HUF members.

In case of senior citizens and super senior citizens, deduction of up to ₹ 1 lakh can be claimed. In case of reimbursement by an insurer or employer reduces the deduction claim. Proper prescriptions and proofs should be furnished.

Income Tax Saving Investments for Young Unmarried Tax-Payers

As a youngster in your 20s and early 30s, and unmarried you can make great use of aggressive tax-saving schemes to grow your wealth. Additionally, you need to focus on building a good financial safety net for your family and parents. There are several tax-saving investment plans for you in this category:

• Term Insurance with a sum assured equal to 10 - 15 times your annual income.
• Health and Mediclaim insurance cover equal to your annual income for yourself and your parents.
• Public Provident Fund, an instrument that provides EEE or triple exemption benefits.
• Allocate a part of your annual income to equity-based tax-saving investment options like Unit Linked Insurance Plans (ULIPs) or Equity Linked Savings Schemes (ELSS).
• Invest in the National Pension Scheme (NPS) for additional tax savings of up to ₹50,000 under Section 80CCD(1B).

Income Tax Saving Investments for Single-Income Couples

If you are married, have a child and only one of the partners is earning, your investment strategy should match your financial goals and family needs. Recommended options include:

• Buy a term insurance cover with accidental and critical illness benefits. Increase the life cover of your existing term plan.
• Public Provident Fund, an instrument that provides EEE or triple exemption benefits.
• Invest up to 50% of your total savings in aggressive tax-saving investment plans like Unit Linked Insurance Plans (ULIPs) or Equity Linked Savings Schemes (ELSS).
• Invest in National Pension Scheme (NPS) to save an additional ₹ 50,000.
• You can also claim a deduction under 80C for your child’s tuition fee.
• You can also claim a deduction under 80C for your child’s tuition fee.
• Invest in a house property for an additional tax saving on interest amount up to ₹ 2 lakh.

Income Tax-Saving Options for Double-Income Couples

If you are married and both you and your spouse earn, you can jointly claim deductions with the right investments:

• Save up to ₹ 3 lakh combined under Section 80C
• Make sure to have joint or individual term insurance coverage
• Invest in Public Provident Fund (PPF), an instrument that provides EEE or triple exemption benefits.
• Invest up to 50% of your savings in aggressive tax-saving plans like Unit Linked Insurance Plans or Equity Linked Savings Schemes (ELSS).
• National Pension Scheme (NPS) for an additional ₹Rs. 50,000 tax deduction under Section 80CCD(1B).

Tax-Saving Investment Options for Senior Citizens

Nearing retirement, we must shift our focus towards ensuring financial stability and especially towards maximizing savings. Consider these tax-saving investments:

• Invest in annuity plans, which not only provide regular income but also help save on taxes, like the Senior Citizen Saving Scheme or life insurance pension plans.
• Special annuity products by insurance companies also help provide a regular income post-retirement.
• Unit Linked Insurance Plans also make a good tool for retirement fund creation and offer tax benefits Section 80C, with tax-free proceeds on maturity.

Tax Saving Options for Family Business Owners

Family-run businesses and enterprises are liable to pay income tax on their revenues generated, which can be a considerable sum. They must therefore take benefit of tax deductions and exemptions available to minimise their tax liability as a company:

• Form an HUF to reduce the overall tax outgo on the company income
• Health insurance premiums up to ₹25,000 for self, spouse, or dependent children are deductible under Section 80D.
• Donations to approved charities are eligible for deductions under Section 80G.