6 Tax Saving Investment Avenues

As an investor, one should look for investment options that not only help you save tax but also generate tax-free income. 

While choosing the right tax saver, among several other factors such as safety, liquidity and returns, make sure you understand how the returns would be taxed. If the income earned is taxable, the scope to make money over the long run gets constrained as taxes will eat into your returns. 

Here are few such tax savers that not only help you save tax but also help you earn tax-free income. 

TAX SAVING INVESTMENT INSTRUMENTS:

1.EQUITY-LINKED SAVINGS SCHEMES 

* From April 1, 2018 any LTCG made on transfer of equity MFs that have an equity exposure of 65 per cent or more including Equity-linked savings schemes (ELSS) will have to pay a 10 per cent tax on long-term gains. It is important to note that gains made above Rs 1 lakh per annum will only be subject to tax and any gains made below that limit in one FY remains tax-exempt. The LTCG made till January 31, 2018, however, remains grandfathered. i.e., those gains remain tax-exempt. 

Equity-linked savings schemes (ELSS) are diversified equity mutual funds with two differentiating features - one, investment amount in them qualifies for tax benefit under Section 80C of the Income Tax Act, 1961, up to a limit of Rs 1.5 lakh a year and secondly, the amount invested has a lock-in period of 3 years. Every mutual fund (MF) house offers them and generally uses the word tax saving in its name to distinguish them from their other mutual fund schemes. The returns in ELSS are not fixed and neither assured but is dependent on the performance of equity markets. 

2. PUBLIC PROVIDENT FUND 

For decades, Public Provident Fund (PPF) Scheme, 1968 has been a favorite savings avenue for several investors and is still standing tall. After all, the principal and the interest earned have a sovereign guarantee and the returns are tax-free. 

3. EMPLOYEES’ PROVIDENT FUND 

Employees' Provident Fund (EPF) is another avenue that helps a salaried individual not only helps save tax through involuntary savings but also accumulate tax-free corpus. An employee contributes 12 percent of one's basic salary each month mandatorily towards his EPF account. An equal share is contributed by the employer but only a portion (3.67 percent) goes into EPF. 

The employee's contributions qualify for tax benefit under Section 80C of the Income Tax Act, 1961, up to a limit of Rs 1.5 lakh a year but not the employer's share. 

4. UNIT LINKED INSURANCE PLAN 

Unit linked insurance plan (Ulip) is a hybrid product, a combo of protection and saving. It not only provides life insurance but also helps channel one's savings into various market-linked assets for meeting long-term goals. 

5. Traditional insurance plans

Traditional insurance plans could be an endowment, money-back or a whole life plan. Unlike pure term insurance plans they have a savings element in them and come with a fixed term and a fixed sum assured. The premiums are based on the age at the time of entry, the life coverage and the period for which coverage is required. Premiums are to be paid each year till maturity. Few such plans have a limited premium payment option in which premiums are to be paid only for a specified term but the policy continues for long. For example, a policy of 25 years may require premiums to be paid only for the first 5 or ten years. 

While the premium paid qualifies for tax benefit under section 80C, the maturity value and the death benefit is tax-free. 

6. SUKANYA SAMRIDDHI YOJANA 

Sukanya Samriddhi Yojana (SSY) is a small deposit scheme for the girl child launched as a part of the 'Beti Bachao Beti Padhao' campaign. It is currently fetching an interest rate of 8.1 percent and provides income-tax benefit. 

A Sukanya Samriddhi Account can be opened any time after the birth of a girl till she turns 10, with a minimum deposit of Rs 1,000. A maximum of Rs 1.5 lakh can be deposited during the ongoing financial year. The account will remain operative for 21 years from the date of its opening or tuntil the marriage of the girl after she turns 18.