TAX SAVING PLANS
Tax-saving and tax-cutting investments are a critical part of financial planning, particularly in
countries like India where tax laws offer various options to reduce taxable income and optimize the
tax burden. These investments help individuals save taxes while building wealth for the future. Let’s
take a look at various tax-saving investment plans under Section 80C and other sections, along with
their benefits and limitations.
1. Employees' Provident Fund (EPF)
Description: EPF is a government-backed retirement savings scheme for salaried individuals. Both the
employee and employer contribute a percentage of the employee’s salary.
Tax Benefit: Contributions to EPF are eligible for tax deduction under Section 80C up to ₹1.5 lakh. Additionally,
the interest earned is tax-free, and the corpus is also tax-exempt on withdrawal after 5 years of continuous
service.
Benefits:
Government-backed, low risk.
Tax-free interest and withdrawals after 5 years.
Limitations:
Locked in until retirement or certain conditions (such as resignation, retirement, etc.).
If withdrawn before 5 years, interest becomes taxable.
2. Public Provident Fund (PPF)
Description: A long-term savings scheme backed by the government, offering tax benefits, along with
guaranteed returns.
Tax Benefit: Contributions to PPF are deductible under Section 80C up to ₹1.5 lakh per financial year. The
interest earned is tax-free, and the maturity amount is also tax-free.
Benefits:
Government-backed, guaranteed returns.
Tax-free interest and maturity proceeds.
Flexible tenure, with a lock-in period of 15 years, which can be extended in blocks of 5 years.
Limitations:
Lock-in period of 15 years.
Limited to a maximum annual contribution of ₹1.5 lakh.
3. National Savings Certificate (NSC)
Description: A fixed-income investment scheme offered by India Post with a fixed interest rate.
Tax Benefit: Contributions to NSC are eligible for tax deduction under Section 80C up to ₹1.5 lakh. Additionally,
the interest earned is eligible for tax benefits but is taxable every year.
Benefits:
Fixed and guaranteed returns.
Available at post offices, easy to invest.
Limitations:
Interest earned is taxable every year, though the interest is reinvested.
Limited to a maximum annual contribution of ₹1.5 lakh.
4. Tax-Saving Fixed Deposits (FDs)
Description: Fixed deposits offered by banks and financial institutions with a lock-in period of 5 years.
Tax Benefit: Investment in tax-saving FDs qualifies for deduction under Section 80C up to ₹1.5 lakh. The
interest earned on these FDs, however, is taxable.
Benefits:
Safe, low-risk investment.
Fixed returns over 5 years.
Limitations:
Taxable interest, even though the principal is tax-deductible.
5-year lock-in period, making the money illiquid.
5. National Pension Scheme (NPS)
Description: A voluntary retirement savings scheme managed by the government, aiming to provide long-term
wealth accumulation for retirement.
Tax Benefit: Contributions to NPS are eligible for tax deduction under Section 80C up to ₹1.5 lakh. Additionally,
there is an extra deduction of ₹50,000 under Section 80CCD(1B) for contributions to NPS.
Benefits:
Tax benefits under Section 80C and Section 80CCD(1B).
Offers a pension upon retirement, ensuring long-term income.
Limitations:
Partial withdrawals are allowed only after 3 years.
Lock-in period until retirement.
NPS maturity proceeds are taxable after retirement.
6. Unit Linked Insurance Plans (ULIPs)
Description: A combination of life insurance and investment, where the premium paid is partly invested in
equity, debt, or a combination of both.
Tax Benefit: Premium paid is eligible for tax deduction under Section 80C up to ₹1.5 lakh. Additionally, the
maturity amount is tax-free under Section 10(10D), provided the premium paid does not exceed 10% of the
sum assured.
Benefits:
Offers both insurance coverage and investment opportunities.
Tax-free maturity benefit under certain conditions.
Limitations:
Charges are higher compared to term insurance.
Returns are market-dependent, hence riskier.
7. Senior Citizens Savings Scheme (SCSS)
Description: A government-backed savings scheme for senior citizens (aged 60 or above), providing quarterly
interest payouts.
Tax Benefit: Investment in SCSS qualifies for tax deduction under Section 80C up to ₹1.5 lakh. However, the
interest earned is taxable.
Benefits:
Safe and government-backed.
Regular interest payouts every quarter.
Limitations:
Interest earned is taxable.
The maximum investment limit is ₹15 lakh for a couple.
Only available to senior citizens.
8. Sukanya Samriddhi Yojana (SSY)
Description: A government-backed savings scheme aimed at securing the future of a girl child.
Tax Benefit: Contributions are eligible for tax deduction under Section 80C up to ₹1.5 lakh, and the interest
earned is tax-free.
Benefits:
Attractive interest rate, tax-free interest.
Only for parents of a girl child, with an account for up to 21 years.
Limitations:
Available only for a girl child.
Contributions are limited to a maximum of ₹1.5 lakh annually.
9. Health Insurance (Section 80D)
Description: Premiums paid for health insurance policies for self, spouse, children, and parents.
Tax Benefit: Deduction under Section 80D for premiums paid. You can claim deductions of up to ₹25,000 for
self, spouse, and children (₹50,000 for senior citizens).
Benefits:
Provides coverage against medical expenses.
Deduction available for premiums paid, helping reduce taxable income.
Limitations:
Coverage may have limits, and premiums may increase with age.
The policy terms and conditions must be reviewed for adequate coverage.
10. Interest on Home Loan (Section 24(b))
Description: Interest paid on home loans taken for the purchase, construction, or renovation of a property.
Tax Benefit: You can claim a deduction of up to ₹2 lakh annually under Section 24(b) for interest paid on home
loans.
Benefits:
Helps reduce taxable income through interest deductions.
Enables homeownership with tax-saving benefits.
Limitations:
Only the interest portion qualifies for deductions, not the principal.
The property must be self-occupied or rented for the deduction to apply.
Conclusion:
Tax-saving investments are a great way to reduce taxable income and build wealth, but they come
with their own set of benefits and limitations. It’s important to choose the right combination of tax-
saving instruments based on your financial goals, risk tolerance, and investment horizon. Some offer
guaranteed returns, while others depend on market performance, so it's essential to balance your
portfolio appropriately.
