Best Tax Saving Investments: A Crucial Guide for your Tax Management

When it comes to enhancing your tax liability, the Income Tax Act, 1961 offers a variety of opportunities for taxpayers to save taxes. One of the most popular sections for tax-saving purposes under Income Tax Act, 1961 is Section 80C. As per this section, individuals and Hindu Undivided Families (HUFs) can claim deductions on investments and expenditures, up to a maximum limit of ₹1.5 lakh. The deduction under Section 80C not only helps in reduction of the taxable income but also motivates individuals to determine their savings with the help of investments. In this article we will discuss about some Best Tax Saving Investments under Section 80C.

Before we move on discuss about Best Tax Saving Investments, let us understand about the concept of Tax Saving, its importance and will also have a quick look on Section 80C of the Income Tax Act, 1961.

Understanding Tax Saving

Tax-saving refers to methods and investment options that help taxpayers reduce their tax burden while acting in compliance with the law. The Income Tax Department, through the Income Tax Act, 1961 offers various options that allow taxpayers to save taxes by investment made by them in specific instruments or undertaking certain activities.

Tax Saving is a form of Financial Planning that may help Tax Payer or individual to reduce their tax obligations and to avail the benefits of deductions available under Income Tax Act, 1961.

Also read our Article on: Tax Planning for Individuals under Income Tax Act, 1961

Importance of Tax Saving for Taxpayers

The following are the importance of Tax Saving for Tax Payers:

• Financial Planning: Tax-saving plays a crucial role in financial planning done by Individual. They motivate taxpayers to invest in options that not only gives better returns but also provide tax benefits. Such investments help individuals in building a comprehensive investment portfolio and on the same time reducing their taxable obligation.
• Reduced Tax Liability: The main advantage of tax-saving is the reduction of tax liability. By using the provisions offered by the Income Tax Department, taxpayers can lower their taxable income, resulting in lower tax burden. 
• Wealth Creation: Many tax-saving instruments, like Equity-Linked Savings Schemes (ELSS) and Public Provident Fund (PPF), have the potential to generate good returns for the long term investment. By investing in these options, taxpayers can create wealth while saving huge on tax.
• Boosting Economic Growth: Tax-saving options often use the funds into critical sectors of the economy, such as infrastructure, housing, etc. This not only generates employment but also empowers economic growth.
• Financial Security: Tax saving options, such as life insurance policies provides individuals with financial security. These instruments ensure that taxpayer’s money is safe in emergency conditions such as medical emergency or unwanted situations. 

Understanding Section 80C of the Income Tax Act, 1961

Section 80C of the Income Tax Act, 1961, is a tax-saving clause that offers deductions on the total taxable income of an individual or Hindu Undivided Family (HUF). According to this section, taxpayers can claim deductions up to a specified limit of 1.5 Lakhs Rupees on certain investments, expenditures. The deductions claimed under Section 80C help taxpayer in reducing their taxable income due to which their tax liability decreased.

Since we have now have some idea about tax saving and Section 80C, hence now let us discuss about some Best Tax Saving Investments under Section 80C.

Best Tax Saving Investments under Section 80C of Income Tax Act, 1961

The following are some of the best way to save tax under 80C:

• Equity-Linked Savings Schemes (ELSS): Equity-Linked Savings Schemes are commonly known as ELSS, are types of mutual funds that specifically invest in equities. They offer both potential high returns and tax savings. ELSS has a lock-in period of just three years and it is the shortest among all the options under Section 80C. ELSS has the capability to create money upon the long term investment goals; ELSS could be a good choice for investors who are willing to take moderate amount of risks for good returns.

• Public Provident Fund (PPF): PPF is a long-term savings investment scheme that can provide both tax benefits and a fixed interest rate. The investment made by taxpayer in a PPF account is eligible for a deduction under Section 80C, and the interest on the investment is also not taxable. The lock-in period for a PPF account is 15 years, due to which it becomes a suitable option for taxpayers looking for safe returns over a long term investment.

• National Savings Certificate (NSC): NSC is a fixed-income investment scheme that is offered by the Government of India. The interest earned on NSC is compounded annually and is eligible for tax deduction under Section 80C. The NSC has a lock in period of five years, making it a useful option for individuals seeking returns in form of short term investment option.

• Tax-Saver Fixed Deposits: Many banks prevailing in India offer Fixed Deposit schemes which has lock-in period of five years and is also offering tax benefits under Section 80C. These fixed deposits schemes provide a fixed interest rate making it a suitable option for investors who prefer the stability of fixed-income investments.

• Sukanya Samriddhi Yojana: This scheme is comes into picture with an aim to promote the welfare of the girl child. Parents or legal guardians can make a Sukanya Samriddhi Account for a girl child below the age of 10. The investments made under this account are deductible under Section 80C. The scheme offers the investors an attractive interest rates as well as tax-free withdrawals upon maturity. Due to which this scheme is a great choice for long-term savings for education or marriage expenses of a Girl Child.

• National Pension System (NPS): The investment under National Pension System is eligible for a deduction under Section 80CCD (1) of Income Tax Act, 1961. The NPS is a retirement based investment that allows investor to invest in equity and debt instruments, offering potential growth and stability.

• Employee Provident Fund (EPF): EPF is a mandatory scheme for salaried employees. While the employee’s contributions to the EPF gets automatically deducted from their salary, making the entire contribution eligible for a deduction under Section 80C of Income Tax Act, 1961. The EPF aims to provide a secure and efficient manner to save for retirement. Therefore, EPF proves to be an important part of individuals financial planning.

• Senior Citizens’ Saving Scheme (SCSS): Senior Citizens’ Saving Scheme (SCSS) is designed for senior citizens; anyone above 60 years of age qualifies to invest in SCSS. The tenure of Senior Citizens’ Saving Scheme (SCSS) is five years, which can further get extended for another three years. The investments made are eligible for deduction under Section 80C making it best 80c investment for senior citizens.

Important point of consideration that you should keep in mind while investing in Best Tax Saving Investments

The following are some important point of consideration that you should keep in mind while investing in Best Tax Saving Investments:

• Risk Profile: Analyze your risk before investing. Equity-linked savings schemes (ELSS) offer high returns but come with market-related risks. Debt-based instruments such as Public Provident Fund (PPF) and National Savings Certificate (NSC) aims to provide stability.
• Lock-in Period: Different tax-saving options have different lock-in periods. ELSS has the shortest of three years; on the other hand, PPF has a 15-year long tenure. Choose investments that fit with your financial goals and needs.
• Tax Implications: Investments like ELSS offer tax deductions under Section 80C. However, you should be aware of the tax treatment on maturity as some schemes may be partially taxable on withdrawal.

Endnote

Choosing the right tax-saving investment option under Section 80C requires a careful analysis of your financial goals, risk appetite, and investment needs. You can have the diversified view point across various asset classes, such as equity, debt, and government-backed schemes, as this can help you in building a balanced portfolio that fits with your financial objectives.

While these tax-saving investments offer benefits and deductions, it is important to consult with a tax professional before you make any decision regarding investment. You can connect with our experts at Legal Window in case you need any assistance regarding Tax Management.