5 Best Tax Saving Options

Tax season can be stressful, but it doesn't have to be. If you're seeking tax-efficient ways to save read on for our top picks for the best tax saving options available.

As the deadline for tax saving approaches, many people begin searching for the best options available to them. However, the rush to make a decision can sometimes lead to hasty choices. In this article, we will examine a variety of investment options that can be used for tax saving purposes, as well as the advantages and limitations of each option. By thoroughly considering the options and their potential drawbacks, you can make an informed decision that will help you save on taxes while also meeting your financial goals. Let's begin by discussing the most popular and widely-preferred investment option.

Public Provident Fund (PPF) is a long term savings-cum-investment scheme offered by the Government and is one of the most popular and preferred investment schemes to avail tax deduction under section 80C of the Income Tax Act. PPF is preferred mostly because it falls under the EEE category which means that investment made in the scheme is deductible from taxable income in which investment was made, the interest earned on the investment is exempt from tax and the investment and the interest are exempt from tax when withdrawn upon maturity of the account.

Since PPF is a long-term savings scheme and the income generated on the investment is exempt from tax, there are certain restrictions imposed on the PPF account which need to be considered before investing in a PPF account.

• PPF is a long term saving scheme with an account maturity period of 15 years.

• Partial withdrawals from the PPF account are permitted only after 5 years from the date of opening of the PPF account. The withdrawal shall be restricted to 50% of the amount invested till the previous financial year and only one withdrawal shall be permitted during the year.

• Premature account closure is not permitted before completion of 5 years from the date of account opening. Premature account closure shall be permitted only in certain special cases like treatment of life threatening disease of the account holder or his family members, higher education of the account holder of his children or change in the residential status of the account holder. On premature closure of the account 1% penalty on interest shall be levied i.e. the investment would earn interest at 1% less than the rate at which interest has been credited in the account from time to time.

Extension of PPF account:

If the investor wishes to extend his PPF account beyond 15 years from the date of opening, he can get an extension for a further block of 5 years during which he can make deposit in the account and earn interest.

PPF is an ideal investment for individuals looking for long-term investment providing capital protection and guaranteed returns.

Equity Linked Savings Scheme (ELSS) is an equity oriented mutual fund scheme which is eligible for tax deduction under 80C. Being an equity oriented scheme, the long-term returns generated by ELSS are the highest among all investment options that offer tax deduction benefits.

Further the lock-in period in ELSS is only three years which is the lowest among all schemes that offer tax deduction benefits. Though there is no restriction on the amount that can be invested in an ELSS fund the tax deduction is available only up to an investment of Rs. 1,50,000 in a financial year.

ELSS fall under the ETE category, which means that the amount invested is deductible from the taxable income in which the investment is made, the income generated by the investment is taxable (capital appreciation is taxable under capital gains or if dividend option is selected then the dividend income is taxable as per the tax slab of the individual), and lastly the amount withdrawn from the scheme after the lock-in period is not taxable.

Investments in ELSS can be made in lumpsum or in instalments. However, in case of investments made in instalments, the lock-in of 3 years shall be calculated separately for each instalment. As equity is volatile by nature, even though the lock-in period is only 3 years, it is advised to stay invested in an ELSS scheme for as long as possible or at least 7 years to generate meaningful returns on the amount invested.

Premature withdrawal from ELSS is not possible and therefore you have to plan your future expenses carefully before investing in ELSS. Further, you should also note that ELSS being a market linked investment does not provide guaranteed returns though over the long-term returns generated by ELSS have been higher than returns provided by other investment options.

Sukanya Samriddhi Yojana is a small-deposit scheme launched by the Government for girl child as part of the ‘Beti Bachao Beti Padhao’ campaign. An account can be opened under this scheme in the name of the girl child by her guardian with a minimum deposit of Rs. 250. The maximum amount that can be deposited in this account shall be restricted to Rs. 1,50,000 during a financial year. A minimum amount of Rs. 250 will have to be deposited every year to keep the account active. In case the minimum amount has not been deposited the account would be considered as an account under default. The account can be regularised by paying a penalty of Rs. 50 and the minimum deposit amount of Rs. 250 for each year of default.

The account can be opened till the girl attains age of 10 years. Only one account per girl can be opened and an account can be opened only for two girls in a family except in the case of twins/triplets.

Partial withdrawal of funds from the account shall be permitted for the purpose of education of the account holder only after she has passed her 10th standard examination or has attained the age of 18 years, whichever is earlier. However the withdrawal amount shall be restricted to 50% of the balance outstanding at the end of the previous financial year. The withdrawal shall be further restricted to the actual requirement for fees and other charges.

The account shall mature on completion of 21 years from the date of opening of the account. The account holder shall be allowed to close the account before completion of 21 years if she plans to get married, however she should have attained the age of 18 years.

The amount deposited in this account qualifies for deduction under section 80C of the Income Tax Act. The interest earned by the investment in this account is also exempt from tax. Withdrawal of proceeds from this account are also not subject to tax. Therefore Sukanya Samriddhi Yojna also enjoys EEE status like PPF account

A Unit-linked Insurance Plan (ULIP) is a product offered by insurance companies which combines the features of insurance and investment. The insurance premium paid by the policyholder is eligible for deduction under section 80C of the Income Tax Act. The insurance premium consists of two components, one for providing life cover and the other for investment. The investment component is pooled with other policyholders' funds and invested in equity funds, bonds funds or money market instruments by the insurance company. The policyholders have the flexibility to decide how their investment component is allocated, they can choose to invest in either equity funds, debt funds, or a combination of both. Further some funds provide the flexibility to switch funds at any time based on your preferences or market performance.

ULIPs are ideal for long-term investments and can help investors earn high returns over time along with providing life cover to the policyholder. Since ULIPs have an insurance component, they provide death benefit in case of death of the policyholder during the continuance of the policy. In case of untimely death of the policyholder his nominee would receive the sum-assured as per the policy or the value of the fund whichever is higher.

On completion of the policy term, the policyholder receives the fund value as on the date of the completion of the policy term. The amount received by the policyholder at the end of the policy term will also be exempt from tax under section 10(10)D of the Income Tax Act. Therefore ULIPs also belong to the EEE category of investments.

ULIPs have a lock-in period of 5 years and therefore tend to be long-term investment options. The policyholder does not have an option of premature withdrawal of the funds before completion of 5 years from the date of commencement of the policy term.

There is no restriction on surrender of the policy, however surrendering the policy before 5 years would result in penalty charges and tax implications on the surrender value. The surrender value would become chargeable to tax in the year in which the policy is surrendered and will therefore have to be added to the gross total income of the policyholder.

The National Pension System (NPS) is a voluntary retirement savings plan that allows individuals to plan for their future through regular contributions. The goal of NPS is to promote the habit of saving for retirement among citizens and to provide a sustainable solution for ensuring adequate retirement income for all citizens of India. The scheme is designed to allow subscribers to make informed decisions about their savings through systematic contributions during their working years.

In NPS, individual contributions are collected into a pension fund which is then invested by professional fund managers regulated by PFRDA in a diversified portfolio of government bonds, bills, corporate debentures and shares as per the approved investment guidelines. NPS provides a variety of investment options and Pension Funds to choose from. This allows the subscribers to plan the growth of their investments in a reasonable manner and to monitor the growth of their pension corpus. Subscribers also get the flexibility to switch between investment options or fund managers at any time.

The process of opening an account with NPS is straightforward, as it provides a Permanent Retirement Account Number (PRAN) that is unique and remains with the subscriber throughout his lifetime. The scheme is divided into two tiers: Tier-I, a non-withdrawable permanent retirement account where regular contributions are made and invested, and Tier-II, a voluntary withdrawable account, which can only be opened if the subscriber already has an active Tier-I account. Withdrawals from this account are allowed as per the needs of the subscriber.

The NPS offers a dual benefit of low cost and the power of compounding, where the accumulated pension wealth of the subscriber grows over time with compounding effect. Because the account maintenance charges are low, the accumulated pension wealth for the subscriber becomes substantial in the long-term, up to the retirement time. This allows subscribers to take advantage of the compounding effect of their investments, while also keeping costs low, which can have a significant impact on the overall size of the pension corpus over a long period of time.

Upon reaching the retirement age (60 years), a minimum of 40% of the accumulated pension wealth must be used to purchase a monthly annuity or pension. However, the subscriber has the option to use more than 40% of their accumulated pension wealth for the purchase of an annuity. The remaining 60% of the accumulated pension wealth will be paid to the subscriber as a lump sum. This gives the flexibility and choices to the subscribers to decide what will be the best for them.

In conclusion, there are several tax saving investment options available that can help individuals save money on taxes while also growing their wealth. The 5 best tax saving investments include:

1. Public Provident Fund (PPF): PPF is a long-term investment option with a lock-in period of 15 years. It offers a fixed rate of interest and is tax-free on maturity.

2. Equity-Linked Savings Scheme (ELSS): ELSS is a type of mutual fund that invests primarily in equity shares. It has a lock-in period of 3 years and offers the potential for higher returns compared to other tax saving options.

3. Sukanya Samriddhi Account: Sukanya Samriddhi Account is a savings scheme for the girl child. It has a maturity period of 21 years and offers a fixed rate of interest. The interest earned and the deposit amount are tax-free on maturity.

4. Unit-Linked Insurance Plan (ULIP): ULIP is a type of insurance plan that combines investment and insurance. It offers a choice of investment options, including equity, debt and balanced funds.

5. National Pension System (NPS): The National Pension System (NPS) is a voluntary retirement savings plan that allows individuals to plan for their future through regular contributions. It also offers a choice of investment options, including equity or debt or a mix of both.

It is crucial to stay informed about any changes in laws and regulations when making long-term investments. Additionally, it is essential to align your investment choices with your investment horizon, risk appetite and overall financial objectives, to make informed decisions on tax saving investments.