What Investment Options Come with Tax Incentives

Financial advisors suggest making investments for multiple reasons, out of which the primary reason is to create an asset that will help you generate an additional income. Some say it is a way to make your money work for you. Another major factor that makes the investment a viable option for investors is the tax-saving incentive. However, not all investments come with tax incentives.

This article discusses the various investment options available in the market that can help you increase your wealth and simultaneously, offer tax relief.

• National Pension Scheme

The National Pension Scheme is one of the best tax-saving options available. The main purpose of the investment is to help you build your retirement corpus while providing you with a tax incentive. You can avail of tax benefits in three ways under this scheme.

- Under Section 80C of the Income Tax Act, 1961, you can claim an exemption of up to Rs.1.5 lac against contributions made towards NPS.

- Under Section 80CCD (1) of the same act, you can avail of an additional deduction of up to Rs.50,0000.

- If 10% of your basic salary is being contributed to NPS by your employer, it cannot be taxed.

• Equity-Linked Saving Scheme

Equity-Linked Saving Schemes are diversified mutual fund investment options that provide the investor with significant tax-saving options. ELSS comes with a lock-in period of three years and is a popular tax-saving fund. Although the returns are dependent on the market fluctuations, ELSS funds are known to provide an average return of 15% to 18%. Under the Income Tax Act, Section 80C, contributions made to ELSS funds provides tax exemption up to Rs.1.5 lacs.

• Public Provident Fund

Public Provident Fund is a popular long-term investment scheme that is known for its multiple investor-friendly features and EEE status. EEE stands for exempt-exempt-exempt, which denotes that the contribution made toward the PPF, the interest earned on the PPF account, and the maturity PPF amount are all exempt from taxation. The PPF account has a lock-in period of fifteen years and an investment return of 7% to 8%. Given that it is a government scheme, PPF is considered to be a safe and viable option for investment. You can claim the tax benefits of up to Rs.1.5 lac under Section 80C for PPF.

• Employee’s Provident Fund

Employee’s Provident Fund is another popular tax-saving investment, only for salaried individuals. The individual contributes 12% of their basic salary to the EPF account, and an equal share is contributed by the employer, though only 3.67% of their contribution goes to the EPF account. The individual’s contribution qualifies for a tax rebate of up to Rs.1.5 lac under Section 80C, but not the employer’s contribution. The EPF account has a varying rate of interest every year based on the national budget but averages around 8%.

• Unit Linked Insurance Plan

Unit linked insurance plans not only provide individuals with tax benefits but also offer a chance to get high returns via a long-term investment. ULIPs offered by insurance companies now come with zero premium allocation and zero administration charges, making the returns all the more attractive for investors. The premium paid towards a ULIP qualifies for tax savings under Section 80C of up to Rs.1.5 lac and the investment returns are exempted from tax under Section 10 (10D) of the Income Tax Act subject to conditions mentioned in the said sections Further, Finance Act 2021 amended Section 10(10D) of the Income Tax Act to provide that no exemption shall be available to any unit linked insurance policy (ULIP) issued on or after 1 February 2021 if the amount of premium payable for any of the previous year during the term of the policy exceeds Rs. 2,50,000. Any sum received on death of the person will be exempted and no capital gain or tax would be levied under Income Tax Act. Any profits and gains arising to a person from receipt of any sum at the time of maturity, surrender or partial withdrawal under such high value ULIP where premium exceed Rs 2,50,000 and it shall be taxable as capital gains in the year of receipt.

• Fixed Deposits

Tax-saving fixed deposits provides a guaranteed return on investment. The only catch to the tax-saving fixed deposits is that it comes with a lock-in period of five years. The individual can get a tax exemption of up to Rs.1.5 lac under Section 80C via this investment. It is a suitable option for individuals with low-risk appetite.

• Sukanya Samridhi Yojana

Sukanya Samridhi Yojana is a small investment option specifically created by the government for girl children. The current rate of interest offered under the scheme is 8.1%. The scheme offers tax benefits under Section 80C of up to Rs.1.5 lac on the investment amount. It also offers tax exemption on the maturity and withdrawal amount.

The given investment options should be considered keeping one’s tax-saving objectives and financial goals in mind.

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The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible.