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Most Beneficial Income Tax Saving Instruments to Consider This Tax Planning Season

IDBI Federal Life Insurance Co Ltd.

As we near the end of the financial year, all of us seek expert advice to understand how we can save as much as tax as possible—admittedly, most of this takes place at the last minute where we are more prone to making financial blunders. Thankfully, there are many ways to help you structure your tax planning. It is prudent to prepare well in advance by carefully evaluating the pros and cons of all options available. Here is a list of some of the most popular tax-saving instruments among Indians.

  1. Mutual Funds
    Investing in mutual funds via equity linked saving scheme (ELSS) is popular among many taxpayers owing to the huge returns offered on the investment amount. This scheme, however, entails a 3-year lock-in period. The best mode to invest in ELSS is via a systematic investment plan (or SIP), which helps you inculcate a disciplined habit to save. Moreover, periodic investments across the year help you average your cost of investment.
  2. National Pension Scheme (NPS)
    This scheme was introduced by the Indian Government to primarily cater to the retirement needs of working professionals, especially those who do not have access to the Employee Provident Fund. NPS provides a sense of security, with an average annual interest rate ranging from 9% to 12%. A partial withdrawal (tax-free) can be made after 15 years.
  3. Health Insurance Premium
    If you are covered by a health insurance policy, the premium you pay can be claimed toward tax deduction. The maximum annual limit is INR 25,000 (INR 30,000 in case of senior citizens). This benefit is available for the premium paid for self as well as family (spouse, parents, and children).
  4. Public Provident Fund (PPF)
    This is one of the statutory tax-saving options facilitated by the Indian government. PPF is a long-term debt scheme, with 15 years’ lock-in. You earn 8% tax-free return, which gets compounded each year. You can invest as little as INR 500 to as much as INR 70,000 per year.
  5. Fixed Deposit (FD)
    Tax-saving FDs with a fixed term of 5 years can be started in your bank or at the post office. The annual interest rates vary, usually between 6% and 7.5 %. You can invest a maximum of INR 1,50,000.
  6. National Savings Certificate (NSC)
    This scheme is offered exclusively by the Indian Post. You can invest in denominations of INR 100 to INR 10,000 for a tenure of 5-10 years. The interest rate from an NSC is similar to that obtained from an FD or PPF.
  7. Life Insurance Pension - This has to be Premium
    With a life insurance cover, you can get a tax deduction of up to INR 1,50,000 annually for the premium paid. Moreover, the amount you receive as proceeds upon maturity or the demise of the insured is also exempt from income tax.
    Other tax-saving instruments commonly used include Sukanya Samriddhi Yojana, Employee Provident Fund, and ULIPs. While all these instruments help you reap the benefits of tax exemption, it is essential to consider the safety, returns, as well as liquidity—factors that will help you increase your financial stability in the future.

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