Find out about various types of tax saving instruments for taxpayers

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Tax Saving Instruments

Key takeaways

  • ELSS or Equity Linked Savings Scheme is one of the most popular tax saving investment schemes for taxpayers.
  • You will be able to save a lot of money by investing in multiple tax saving schemes.
  • An ideal taxpayer would start their tax saving investment journey at the beginning of the year instead of waiting for the 31st of March (which is the end of any financial year).
  • Your tax planning should ideally begin from 1st April.

Summary in brief

  • Definition of tax saving schemes
  • List of tax saving instruments available in India
  • Final words
  • Frequently asked questions

Most of us are aware of the fact that the 31st of March of every calendar year is the date which is marked as the conclusion of a financial year. However, what you can definitely keep a note of is that at this time a lot of people rush in order to invest in the best tax saving schemes.

Even though it is undoubtedly a good idea to invest your money in tax saving instruments you will also have to be very careful while doing the same. You can definitely reduce your tax liability by investing in them but at the same time, you have to understand them thoroughly before making a solid investment decision. 

In this article, we will discuss which instrument saves tax and how much you can benefit from them but first, we will be looking at the definition of tax-saver schemes.

Definition of tax saver schemes

If you are a taxpayer then know that tax saving instruments are an effective way to save your money while you file for your income tax at the end of the financial year. More importantly, you should not underestimate the advantages of tax saving schemes because they can save you an enormous amount of money in the long run.

Most of the tax saving schemes come under Section 80CC and Section 80C of the Income Tax Act, of 1961. Also, remember that if you are a self-employed person or a salaried individual then your tax saving season begins on the 1st of April of every year.

Although a lot of people, including regular taxpayers may know about the best tax saving schemes, yet, they don’t actually consider investing in them because of the risks involved. Also, there is great unawareness of the modest returns you receive from the same. Furthermore, according to a lot of people, the only reliable saving instrument that they can fall back on is ELSS or equity-linked savings plan.

It is definitely true that ELSS is a popular and well-recognised tax saving investment choice depending on your risk tolerance and investment goals, nevertheless, it is not the sole tax saving instrument accessible to Indian taxpayers.

List of tax saving instruments available in India

Let us check out some of the best tax saving investments in India you can opt for and look at how they can save you money.

EPF or Employees Provident Fund

Employees Provident Fund or EPF is another tax saving instrument most of the individuals (mainly employees) of this country are a part of. Even though a monthly contribution from both your employers and yourself gets credited in this scheme, you will be able to save a lot of money if you further invest in the same. Not to mention, any salaried employee can claim up to Rs. 1.5 lakh tax deduction if they invest in this scheme. Another important advantage of this tax instrument is that the entire corpus you will receive while withdrawing money from this fund is tax exempted.

Equity-Linked Savings Scheme (ELSS)

ELSS of Equity Linked Saving Scheme is a mutual fund scheme that is available to the general public. There is at least a three year lock in period of this scheme which means after investing your money in this tax saving instrument, you will not be able to take it out for at least three years. According to Section 80C of the Indian Income Tax Act, anyone who has invested in the ELSS will become eligible for a tax deduction of up to Rs. 1.5 lakhs. 

If you are thinking about investing in ELSS then remember that you will have to pay a 10% tax on LTCG or long-term capital gains under this scheme.

NPS or National Pension Scheme

There are multiple government-backed tax saving instruments available in India and, NPS or National Pension Scheme is one of them. This scheme has been introduced by the government to support people who want to save money for their retirement. This implies that every individual investing in this scheme will be able to receive pension benefits.

The NPS is mandatory for both central and state government employees and if a private sector employee wants to invest in this scheme they are free to do so. However, by selecting this particular scheme they won’t be eligible to invest in EPF or Employees Provident Fund. With a lock-in period of three years, individuals who have opted for this scheme will be eligible for a tax deduction of Rs. 1.5 lakhs.

However, after the completion of three years, you will be eligible to withdraw 25% of the contributions you have made to your NPS account in a total of three stages.

NSC or National Savings Certificate

As the name of the scheme suggests, NSC or National Saving Certificate is a tax saving scheme that can offer you guaranteed returns because it is backed by the Government of India. Although it has a lock-in period of at least five years, you can start investing in this scheme by depositing Rs.1000 in any post office in this country that offers NSC services.

If you are to invest in this tax saving instrument for the financial year 2022-23, you will receive 6.80% interest on your investment and at the same time, you will also be able to receive tax benefits. As per Section 80C of the Income Tax Act, by investing in this scheme you can receive up to Rs. 1.5 lakh tax deduction for a single financial year.

PPF or Public Provident Fund

Another equally popular investment scheme in which you can invest to receive tax deductions is PPF or Public Provident Fund. An important fact about this scheme is that it is an initiative from the Government of India and the positive point of this scheme is that it has extremely low risk associated with it while it can offer the investors assured returns. Right now the Government of India is offering an interest rate of 7.1% on the investments made on PPF. The total investment duration of this scheme is 15 years.

According to Section 80C IT Act of India, if you choose to invest in this tax saving instrument you will be able to receive a tax deduction of Rs. 1.5 lakhs (maximum limit). An additional advantage of investing in this scheme is that it falls under the EEE or  Exempt, Exempt, Exempt, which means that you won’t have to pay any tax on the total amount of interest, investment amount and the overall money you will receive at the time withdrawal.

Final words

Ideally, if you are a taxpayer then you should start planning and investing from the beginning of the year because waiting until the last minute can create lots of issues for you. More importantly, your long-term goals can only be achieved if you begin early and make proper investment decisions.

As a final piece of advice, we would suggest you consider investing in these instruments as your actual goal and think of the tax saving part as a secondary bonus.

  • Which option is best for tax saving?

  • What instruments save taxes?

  • Why do we use tax saving instruments?