Discover the top tax-saving investment options for 2023: ULIP, PPF, fixed deposits, life insurance, and more. Choose wisely and save taxes while achieving financial goals.
Incorporating tax savings investments measures is crucial for effective financial planning, as it enables individuals to achieve their financial objectives while minimising their tax liabilities.
List of Best Tax Saving Investment Options and Plans for 2023
ULIP (Unit Linked Insurance Plan)
A Unit Linked Insurance Plan (ULIP) is a financial instrument that merges life insurance with investment opportunities. ULIPs serve as goal-oriented financial solutions, tied to the capital market, enabling investors to put their money into equity or debt funds according to their risk tolerance. With a variety of investment options and flexible premium payment choices, ULIPs provide policyholders with a comprehensive package. By making regular premium payments, individuals ensure both insurance coverage and investment growth. In the event of the policyholder’s demise, ULIPs are commonly used to offer various payouts to beneficiaries.
Returns: Depends on the plan’s performance
Risk: Moderate to very high
Lock-In Period: 5 years
Tax Deduction Benefit: Up to ₹ 1.5 lakh in an FY under Section 80C of the I-T Act
PPF ( Public Provident Scheme )
In 1968, the National Savings Institute under the Finance Ministry introduced the Public Provident Fund (PPF) scheme in India. It serves as a long-term investment option that offers an attractive rate of interest and returns on the invested amount. The primary objective of the scheme is to mobilise small savings by providing an investment avenue that combines reasonable returns with income tax benefits. Notably, the interest earned and the returns from the PPF scheme are not taxable under the Income Tax regulations. As for the scheme’s duration, it has a lock-in period of 15 years, during which the invested amount cannot be withdrawn.
Returns: 7.1% p.a. (for Oct 1, 2021 – Dec 31, 2021, revised quarterly)
Risk: Extremely low-risk as it enjoys a sovereign guarantee
Lock-In Period: 15 years
Tax Deduction Benefit: Up to ₹ 1.5 lakh in an FY under section 80C of the I-T Act
Fixed Deposit
Investing in tax-saving Fixed Deposits allows for tax savings through a deduction under section 80C of the Indian Income Tax Act, 1961. By investing in these FDs, you can claim a maximum deduction of ₹ 1.5 lakh. Such FDs have a lock-in period of 5 years, and the interest earned is subject to taxation. Typically, the interest rates range from 5.5% to 7.75%.
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Life Insurance
Life Insurance is a financial product that offers tax savings investments benefits. However, it is not advisable to purchase life insurance solely for tax savings, as its primary purpose is to provide insurance coverage.
In addition to insurance coverage, life insurance policies provide tax benefits under sections 80C and 10(10D) of the Income Tax Act. The premiums paid and maturity proceeds of the policy are exempt from taxation. Furthermore, any returns such as endowment or money-back offered by the policy are also tax-free. Individuals can claim tax exemption up to the maximum limit of ₹ 1.5 lakh under a life insurance policy.
Senior Citizen Savings Scheme
The Senior Citizens Savings Scheme is exclusively available to senior citizens for tax savings investments purposes. The government announces the scheme’s interest rate every quarter, currently set at 8%. Once invested, the interest rate remains fixed throughout the scheme’s tenure, with quarterly payouts to the senior citizen.
The scheme has a lock-in period of 5 years, but premature closure is permitted with a penalty. Deposits can range from a minimum of ₹ 1000 to a maximum of ₹ 15 lakh, and the Budget 2023 proposes increasing the maximum deposit limit to ₹ 30 lakh from the current ₹ 15 lakh.
Interest earned from the scheme is taxable, but senior citizens can claim deductions under section 80 TTB for the interest received.
National Savings Certificate
The National Savings Certificate (NSC) is a fixed-income investment scheme designed to meet the needs of small and middle-income investors. Similar to the Public Provident Fund (PF), the NSC is a compelling tax-saving option with low risk. By participating in the NSC program, investors can earn an annual interest rate of 6.8%. The scheme allows for a qualified tax deduction of up to ₹ 1.50 lakh, and the interest earned is also eligible for tax exemption.
Interest rate: 6.8%
Investment Amount: Minimum ₹ 1000
Investment Tenure: 5 Years
Tax Benefits: ₹ 1.5 lakh exemption of Section 80C
Tax-saving Mutual Funds
While mutual fund managers consider investing in stocks/mutual funds a wise choice, it’s important to acknowledge the risks associated with market downturns. Nevertheless, mutual funds, particularly Equity Linked Savings Schemes (ELSS), are widely recognised as excellent tax-saving options for individuals with limited liquidity who seek to minimise their tax burden. These funds can be accessed with a minimum contribution of ₹ 500 and have a mandatory lock-in period of three years. ELSS funds have the potential to deliver higher returns within a shorter time frame. By investing in recommended mutual funds or ELSS funds, one can potentially save up to ₹ 46,800 in taxes. Hence, they are often referred to as tax-saving mutual funds.
However, it is crucial to note that there are numerous consistently outperforming funds available. Thoroughly researching these options before investing is essential to ensure long-term wealth generation and selecting the appropriate investment product.
Interest rate: 15% to 18%
Investment Amount: Minimum ₹ 500 Deposit
Investment Tenure: 3 Years
Tax Benefits: ₹ 1.5 lakh exemption of Section 80C,10(10D)
Tax-saving Investment Options and Plans Under Section 80C
| Tax Saving Investment | Expected Returns | Lock-in Period |
| ELSS Fund | Variable | 3 years |
| National Pension Scheme (NPS) | 9% to 12% | Until retirement |
| Unit Linked Insurance Plan (ULIP) | Variable | 5 years |
| Public Provident Fund (PPF) | 7.1% (as of today) | 15 years |
| Sukanya Samriddhi Yojana | 7.6% | 21 years or until marriage |
| National Savings Certificate (NSC) | 6.8% | 5 years |
| Senior Citizen Saving Scheme (SCSS) | 7.4% | 5 years |
| Bank FDs | 5.5% to 7.75% | 5 years |
Health Insurance or Mediclaim
Health Insurance: Health insurance is a comprehensive insurance policy that provides coverage for various medical expenses, including hospitalisation, surgeries, treatments, diagnostic tests, medication costs, and sometimes even preventive care and wellness services. It offers a broader scope of coverage and is not limited to specific medical conditions or treatments. Health insurance policies typically come with a wider range of coverage options, allowing individuals to choose the level of coverage that suits their needs. The coverage can be extended to include family members as well.
Mediclaim: Mediclaim, on the other hand, is a type of health insurance policy that specifically covers expenses related to hospitalisation and treatment for specified illnesses or diseases. It provides financial coverage for medical emergencies and hospitalisation expenses, including room charges, doctor’s fees, surgical costs, and other related expenses. Mediclaim policies usually have a predefined list of covered medical conditions and treatments.
Under Section 80D, health insurance offers tax benefits. Premiums up to ₹ 20,000 for senior citizens and ₹ 15,000 for others are eligible for tax deductions. For instance, if a policyholder pays ₹ 15,000 as premium for their own policy and ₹ 20,000 for their senior citizen parent, they can claim a tax benefit of ₹ 35,000 (₹ 15,000 + ₹ 20,000). The maturity value received under critical illness insurance policies is also tax-free.
Pension Plans
Pension funds, NPS, Immediate Annuity Plans, and Deferred Annuity Plans are among the various pension plans available to secure your financial future. These plans serve specific purposes.
For individuals below 60 years of age, the income tax exemption limit is ₹ 2.5 lakh. Retired individuals aged above 60 years enjoy a higher exemption limit of ₹ 3 lakh, while super senior citizens aged above 80 years have an exemption limit of ₹ 5 lakh for AY 2023-24. Additionally, retired employees can claim an additional deduction of ₹ 50,000 against their salary income. Section 80CCC specifically provides an exemption limit of up to ₹ 1.5 lakh for individual taxpayers who have opted for pension plans.
Interest rate: 2.25% to 9.00%
Investment Amount: No Cap on Maximum Investment
Investment Tenure: Up to 100 Years
Tax Benefits: Up to ₹ 5 lakh exemption of Section 80C, 80CCC
NPS (National Pension Scheme)
The National Pension Scheme (NPS) is a social security initiative by the Central Government. With the exception of armed forces personnel, this pension program is available to employees from various sectors including public, private, and unorganised sectors. The program aims to incentivise employees to contribute to a pension account at regular intervals during their employment. Upon retirement, subscribers have the option to withdraw a portion of the accumulated corpus.
Returns: Depends on the performance of the schemes
Risk: Low to high
Lock-In Period: Till retirement
Tax-Deduction Benefit: Up to ₹ 1.5 lakh in a FY under Section 80C of the I-T Act, and an additional ₹ 50,000 (Tier 1 account) under subsection 80CCD (1B)
Conclusion
For taxpayers in India, there are various tax savings investments options available. Therefore, if you are considering investing in tax savings investments schemes, we recommend that you carefully consider the aforementioned best tax savings investments. However, it is crucial to assess your financial goals and risk tolerance before making any investment decisions in these avenues.
FAQs
What is a tax savings scheme?
A tax savings scheme refers to an investment product or plan that allows individuals to avail tax benefits based on the amount invested, as per the tax regulations of a particular country. These schemes are designed to encourage individuals to save and invest while also reducing their overall tax liability. Tax savings schemes typically provide deductions or exemptions on the amount invested or the premiums paid, thereby reducing the taxable income and lowering the tax burden for the investor. The specific rules and benefits associated with tax savings schemes may vary from country to country.
Which investments are tax free in India?
Which investments are tax free in India? Here are a few investment options that not only provide tax-saving benefits but also offer tax-free returns: Public Provident Fund (PPF) Sukanya Samriddhi Yojana (SSY) Employees Provident Fund (EPF) and Voluntary Provident Fund (VPF) ELSS mutual funds Life insurance policies
Which is the biggest source of tax?
Personal taxes constitute the primary source of tax revenue in India.
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