Instruments that can help you save money on tax are of the essence in the modern day. An increasing number of individuals are now investing in instruments that can help them enhance savings. If you are one of those people who wish to start investing for the purpose of saving on taxes, following are the ten best savings instruments for the financial year 2016-17.
Tax Saving Fixed Deposit
These fixed deposits are similar to most other fixed deposits. Even the interest rate applicable to Tax Saving Fixed Deposits are the same as other fixed deposits. However, investors will not be able to withdraw their funds for a minimum of five years or before the maturity of the scheme. The interest earned on Tax Saving Fixed Deposits is tax free, ensuring that customers enjoy peace of mind and maximum benefits.
Public Provident Fund
Individuals who invest in Public Provident Funds can draw maximum tax savings with full safety as there is plenty of ease and flexibility in PPF accounts. Almost all major banks provide the facility to its customers and the interest paid on PPF accounts is tax free. PPF accounts can be opened for tenures of up to 15 years. Customers will not be allowed to redeem their investment prior to the maturity of the scheme. Loans are offered against PPF by most banks but only after five years of the tenure is completed. Partial withdrawal is also allowed after five years. PPF is among the safest investment choices any Indian investor can make as the funds invested remain with the country’s government and the security against which it is benchmarked is the 10-Year Government Bond, making it so much the safer for investors who are sceptical about putting their money in more risky options.
Employee Provident Fund
Employers have a compulsion to subtract 12% of their employees’ salaries in lieu of EPF (Employee Provident Fund). The employer also makes the same contribution and the investment is eligible for tax deduction. The amount of money you can invest in EPF can be above the prescribed 12% and the excess amount invested into PPF also qualifies for tax deductions. Transferring an EPF from one job to another is as easy as it gets. All you have to do is withdraw the EPF after you leave a job. The money invested in PPF will be locked until the investor retires. The entire amount invested in PPF can also be withdrawn by the investor provided that he / she has been unemployed for a minimum of two months. However, tax will be applicable to any funds withdrawn prior to completion of five years of the scheme. Like PPF, EPF is also among the safest investment choices as the funds remain with the Indian government, thus making it safer for reluctant investors.
National Pension Scheme
Despite the fact that National Pension Scheme is not considered as a popular tax saving instrument, it has the potential to ensure a secure retired life in addition to implementing tax savings. Investments in National Pension Scheme can be claimed as deductions under Section 80C of the Indian Income Tax Act. However, investors can only access the funds once they have retired from professional life.
National Pension Scheme
Individuals who wish to invest in ELSS can decide to invest any amount of money based on their convenience and preference. Although ELSS comes with a minimum lock-in period of three years, investors are urged to stick with their investment for a longer period of time. However, if you require funds from the investment prior to the completion of three years, the dividend option is ideal as it also offers tax-free dividend. ELSS can be as risky as other diversified equity mutual funds as all the funds will be invested in the share market, but long term equities provide a better return than most other forms of investment.
National Saving Certificates
NSCs or National Saving Certificates are a lot like Tax Saving Fixed Deposit with the only major difference being that the returns provided by them are comparatively lower than Bank Fixed Deposits. However, they are regarded as safer options in comparison with fixed deposits as the fund are in the custody of the Indian government. Tax benefits can also be availed from National Saving Certificates under Section 80C of the Income Tax Act. Unlike Employee Provident Fund, Public Provident Fund or Equity Linked Saving Schemes, the interest on National Saving Certificates is taxable. Moreover, the interest in NSCs is accrued annually, meaning that the longer an individual remains invested, the more claims he / she can make for tax deduction. The rate of interest on NSCs for five years is 8.50% and 8.80% for 10 years.
Unit Linked Insurance Plans
Among the most common products in which investors put their money are Unit Linked Insurance Plans as they not only provide insurance cover, but also a sound form of investment. The money invested in ULIPs is put into shares and customers are at liberty to choose how much of their funds must be invested in shares. These policies are highly tax efficient and offer benefits under Section 80C of the Income Tax Act. The maturity amount is also tax free and the product is designed in a manner such that it urges investors to save money on a regular basis.
While investors in term insurance policies cannot gain any maturity amounts, saving on tax is relatively easy thanks to these schemes. The future of the policyholder’s family will be secured in the unfortunate event of the policyholder’s death, thanks to the life cover provided by the policy. Term insurance policies are significantly cheaper than most other insurance packages, making them a fairly decent investment option for tax saving purposes.
While health insurance is usually taken out to protect the well-being of an individual’s self and/or family, it is also an efficient product for tax saving purposes. The premiums paid towards your health insurance policy can be claimed for tax deduction under Section 80D of the Income Tax Act. A maximum of Rs.40,000 can be saved on expenses related to health check-ups and insurance.
Senior Citizens Saving Scheme
As the name suggests, Senior Citizen Saving Scheme offers benefits to the elderly. It is considered the best tax saving scheme for senior citizens as it provides regular interest in the form of interest. Although the interest on these policies are taxable, the fact that most senior citizens earn an amount lesser than the taxable limit means that it shouldn’t be a cause for concern. The Senior Citizens Saving Scheme has a tenure of five years but investors will be allowed to withdraw funds subject to certain terms and conditions. The minimum limit for this scheme is Rs.1000 while the maximum is Rs.15 lacs. The rate of interest offered is 9.2% and it is compounded on a quarterly basis. Regardless of the date on which the investor made the deposit, the interest will be credited to their linked accounts on March 31, June 30, September 30 and December 31. This is among the safer schemes as the funds will remain with the Indian government.
In addition to the aforementioned products, you can find several other tax saving investment instruments too. Products such as tax-free infrastructure bonds, pension plans, life insurance endowment policies, etc. can also help you save plenty of money that would otherwise be spent on taxes, but the products mentioned above are your best bet.