Tax Saving Investment Options

Income tax is a form of direct tax which is imposed on individuals and institutions meeting the criteria as mentioned. More often than not, investors invest in a haphazard manner in order to save tax and end up not serving the actual objective. Tax planning should always be done meticulously to not only minimize tax burden but also maximize return.

There are different tax slabs that individuals and institutions are classified into, based on their income. They are mentioned below:

Tax Slab for Financial Year 2015-16 (Assessment Year 16-17)

For Individual below 60 years of age For Individual (Age above 60 and below 80 years) For Individual (Age 80 years and above)
Income Level Tax Rate Income Level Tax Rate Income Level Tax Rate
Rs. 2,50,000 Nil Upto Rs. 3,00,000 Nil Upto Rs. 5,00,000 Nil
Rs. 2,50,001 - Rs. 500,000 10% Rs. 3,00,001 - Rs. 500,000 10% Rs. 5,00,001 - Rs. 10,00,000 20%
Rs. 500,001 - Rs. 10,00,000 20% Rs. 500,001 - Rs. 10,00,000 20% Above Rs. 10,00,000 30%
Above Rs. 10,00,000 30% Above Rs. 10,00,000 30%  

Before investment options, one should understand the various sections under which tax deductions/exemptions are allowed.

  • The deduction under section 80C is allowed from individual’s Gross Total Income.
  • Section 80CCC: Deduction in respect of Premium Paid for Annuity Plan of LIC or any other insurer
  • Section 80CCD: Deduction in respect of Contribution to Pension Account
  • Total Deduction under section 80C, 80CCC and 80CCD(1) together cannot exceed Rs 1,50,000

Having understood the sections of tax deductions and limits of investment in the same, it is important to know the various tax saving investment options available.

Employee Provident Funds (EPF):

Returns on EPF is tax free under 80C. Salaried individuals compulsorily contribute 12% of the sum of basic pay and dearness allowance to EPF.

House Rent Allowance:

Deduction under HRA is applicable as per section 80C. The maximum deduction is done on the basis of the lower amount which is selected, either from the total amount of rent paid or the amount allocated as HRA in tax payer’s income slip, provided his/her HRA does not exceed 50% and 40% of the income for individuals residing in metro cities and other cities respectively.

Leave Travel Allowance (LTA)

LTA is an allowance given by the employer, when an employee is on leave from work and is travelling. LTA is usually given twice in four years by most employers and the amount is tax exempted.

Home Loans

Tax deduction on principal amount and interest are covered under section 80C and 24 respectively.

Tuition Fee

As per Indian IT Act Section 80C, payment made towards tuition fee for school, college and university as well as coaching institute for a maximum of two children are exempted from one's yearly income tax.

Tax Free Bonds

Investment made in bonds bearing ‘AA’ and ‘AAA’ credit rating and interest earned on it, is not taxable.

National Pension System

There are two types of accounts available under National Pension System namely, Tier 1 account (Non-withdrawable) and Tier 2 account (Withdrawable). While Tier 1 account is mandatory, Tier 2 account is voluntary. A subscriber will be eligible for opening Tier 2 account only if he/she has opened Tier 1 account. Besides, contributions made to Tier 1 account are only eligible for tax deductions under section 80CCD. One can withdraw maximum of 60% at maturity and has to compulsorily contribute 40% towards annuity.

NPS investment is tax deductable as per under section 80CCD up to Rs.1,50,000 and an additional Rs.50,000 under section 80CCD (1B).

It is extremely cost effective since fund management charges are low. The fund managers manage the money in three separate accounts having distinct asset profiles such as, Equity (E), Corporate bonds (C) and Government securities (G). Investors can choose to manage their portfolio actively (active choice) or passively (auto choice).

Rajiv Gandhi Equity Saving Scheme (RGESS)

RGESS provides tax benefits under section 80CCG to the extent of 50% on the invested amount (maximum Rs.50,000). RGESS has been introduced with the objective of encouraging first time investors to adopt the equity culture. Investors whose gross total income is less than Rs.12 lakhs can invest in this scheme. Returns on investment are market linked. However, dividend is tax free.

Public Provident Fund (PPF)

Investment made and interest earned is non-taxable. However, one can make maximum investment of 1.5 lakhs to avail tax benefits. In addition to tax benefits, it also provides the option of taking loans from the beginning of the third year to the end of fifth year and withdrawal from the sixth year onwards.

PPF is a long term saving scheme with the maturity period of 15 years, providing 8.7% interest annually. Maximum investments of 1.5 lakhs p.a. can be made.Accumulated amount and interest earned is non-taxable.

National Saving Certificates (NSC)

Such certificates are issued by Post Offices for 5 and 10 years with interest rate of 8.5 and 8.8% respectively. However, maximum Rs.1.5 lakhs of tax deduction can be availed.Life Insurance

Life Insurance

Tax benefits on premium paid is applicable under 80C.

Health Insurance or Mediclaim

Under section 80D, one can avail tax benefit to the extent of Rs.15000/- on buying health insurance for self, spouse and children and an additional Rs.20,000/- for buying health insurance for parents.

Fixed Deposit with Banks

Deposit made with bank for the lock-in period of five years, is exempted from tax under section 80C. However, the interest earned on deposit is taxable.

Unit Linked Insurance Plans (ULIP)

ULIP is a unique blend of investment and insurance. Here, the premium which is being paid by a customer gets deducted with initial charges while the rest of the amount is invested. Investment made under ULIPs and earnings from it on maturity are tax exempted under section 80C of the IT act.

Equity Linked Saving Schemes

Investment is made in equity or equity related instruments. A tax payer can avail maximum of RS.1.5 lakhs tax benefit under section 80C by investing in this instrument.

ELSS invests in shares and related instrument, therefore, provides higher returns ranging between 10 to 15%. Besides, it has lowest lock-in period of three years as compared to other investment options. ELSS and PPF are the only investment options that offer tax free returns. Other investment options like NSC, fixed deposit with Bank and deposit with Post Office levy tax on the returns.

The above mentioned tax saving investment options will help reduce tax burden to extent great extent. .However, one need not consider all the options, but those which suit him/her the most. One should calculate and check the limit used and then decide on where to invest.

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