Every individual has different long-term financial goals. While saving for these goals, it is ideal to choose investment options that help in tax saving as well. With a number of tax-saving instruments available in the market, it is easier to ensure that you make the most of the available deductions.
The Income Tax Act offers a number of investment avenues for individuals to ensure that they can save on the amount of tax payable. A balanced mix of investment will ensure that you achieve tax saving and wealth maximization. It is also important to choose funds that help generate a tax-exempt income in the long run.
Five best financial instruments to save tax
- Home loans
Taxpayers are allowed to claim a deduction for the principal amount as well as the interest paid on the home loan. In certain cases, the maximum deduction allowed is restricted to INR 2 lakh. Therefore, although home loan is a huge liability, it offers substantial tax benefits to the individual.
- Equity-Linked Saving Scheme (ELSS)
ELSS funds, a type of equity-linked mutual funds, have a higher return and a lock-in period of just three years. The returns from the tax-saving mutual funds are completely tax-free. An amount of INR 1.5 lakh can be invested in ELSS to be eligible for a deduction under Section 80C. The money can be invested in a lump sum or in the form of a Systematic Investment Plan (SIP). The share broker will ensure that the fund is diversified and the risk is low.
- Public Provident Fund (PPF)
Taxpayers looking for definite returns should invest in PPF. An investment in PPF currently earns an interest at 7.6%. This is tax free under section 80C. The investment can be made in the form of a lump sum or in intervals convenient to the investor. The upper limit of such investment is INR 1.5 lakh. It is important to note that the duration for the same is 15 years, which is extendable by 5 years.
- Fixed Deposits (FDs) with a five-year lock-in period
This is one of the oldest and safest investment options to save income tax. A tax deduction amounting to INR 1.5 lakh is offered for the investor’s benefit, but the interest amount remains taxable. Considering the FD has a five-year lock-in period, it is advisable to choose a bank that offers the highest rate of interest.
- United Linked Insurance Plan (ULIP)
ULIP is a life insurance plan, which helps in the creation of wealth as well. It is a mix of debt and equity and the amount paid in the form of the premium is deductible under Section 80C. The maximum deductible amount is INR 1.5 lakh. There is an additional condition that the premium amount should be restricted to 10% of the amount of sum assured under the policy. ULIP comes with a lock-in period of five years and the taxpayers can make partial withdrawals after the said period.
In order to make the most of the available deductions, taxpayers should start planning in advance and choose alternative investment options whether it is tax-saving mutual funds or pension funds. Striking the right balance between the products is a tedious task but depending on the income of the taxpayer, the right investment choices can be made.