“The avoidance of taxes is the only intellectual pursuit that carries any reward.” -John Maynard Keynes
A decision to invest in tax saving instruments should not be taken in haste, which is what happens when one postpones the decision fo the last minute, but those investments should serve the complementary purpose for the larger goals of wealth creation. These investments should be done in line with your targeted asset allocation.
In this article, we look at various financial products available to lower the tax liabilities of an individual. There are many types of financial products available with varying risk-return profile, different maturity and lock-in periods; therefore choosing the right products which aligns with the investors’ objective is crucial.
Let us have a look at each of these products in brief.
Equity Linked Saving Scheme (ELSS)
Equity as an asset class is a long-term instrument with the potential to give high inflation-adjusted returns. ELSS is a good product in the sense that it helps investors take exposure to equity markets while also saving taxes.
ELSSs (Equity Linked Saving Schemes) are equity mutual fund schemes that are permissible instruments under section 80C which can be used to save taxes. An individual can invest up to Rs 1.5 Lakhs against which tax benefit could be availed.
Investment
Investment in ELSS funds can be made as a lump sum of the desired amount; or through systematic investment. Systematic Investment Plan (SIP) is the better method for most investors as it avoids market timing; instead, it averages the investment over the period.
Returns
The historical performance of ELSS funds in the long term has been stellar in comparison to any other tax saving product available to the investor. Many stars performing funds have returned over 15% per annum in the long term (5 years or more).
Investment Horizon
The investments are locked in for a period of three years from the date of investment; in case of investments made through SIPs, each installment must complete three years individually. The invested amount can be left to earn returns after completion of the necessary lock-in period.
Taxation
The maturity proceeds from ELSS fund are taxable with the introduction of long term capital gains tax on equities, the profits over Rs one lakh would be taxed at a 10% rate with no benefits of indexation.
Conclusion
As an asset class, equities are more volatile in the short term but give a superior return in the longer term (5 years or more). Therefore investment in ELSS should be made from a longer-term perspective and it is advised to be used for long term financial goals.
PPF (Public Provident Fund)
An investor looking for safer options of investments which save taxes can invest in PPF, which is a fixed income instrument whose interest is fixed by the government quarterly. Being government-backed, PPF have almost zero default risk and comes in the coveted category of EEE (Exempt, Exempt, Exempt) meaning that one can avail tax benefit of up to Rs 1.5 lakh under section 80C, the interest earned on this investment will be tax free as well as the maturity proceeds too will be tax free.
Investment
A PPF account can be opened in designated Post office or Bank branches with a sum of Rs 500 or more. The maximum investment limit in PPF is Rs 1.5 lakh per annum.
Returns
PPF is basically a debt product and the interest payable is decided by the government every quarter. The current rate of interest is 8% per annum.
Lock-in period
The investment done in PPF comes with a lock-in period of 15 years.
Maturity
The maturity period for PPF is 15 years but if an investor wants, it can be extended for five-year blocks indefinitely.
Taxation
All proceeds after maturity are tax exempted.
Conclusion
Partial withdrawals allowed with the start of 7th years and loans can also be availed against its deposits. PPF is good for long term planning and can be used for the debt allocation of the individual.
Senior Citizen Savings Scheme (SCSS)
Senior citizens of the age of 60 or more looking to park their retirement funds in a safe and stable product can use SCSS. A voluntarily retired individual of age over 55 or defence personnel over the age of 50 can also use this scheme for savings. One can avail the entire limit of Rs 1.5 lakh under section 80 C to save taxes.
Investment
While one thousand is the minimum deposit; investors can deposit any amount in the multiple of Rs 1,000 to a maximum of Rs 15, 00, 000. A senior citizen can open more than one account in the single or joint mode subject to the maximum limit of Rs 15, 00, 000 in all of the accounts combined.
Returns
The scheme provides quarterly interest payment and so it is a big draw for senior citizens who want regular income. Currently, the return is 8.6% per annum.
Lock-in period
The scheme has a 5-year lock-in with provisions for premature withdrawal with a penalty.
Taxation
Interests are taxed at income tax slab rate, subject to the limit of waiver for senior citizens.
Maturity
The maturity period is 5 years. Premature withdrawals are allowed after one year and attract penalties. The withdrawal done after one year and before two years attract 1.5% penalty while after the completion of two years it is 1%.
Conclusion
The investment in SCSS is a good option for retirees and they can park a part of their corpus in this instrument. The returns are on the lower side, considering the inflation risk and increased life expectancy; other options like mutual funds can also be explored both for tax efficiency and regular income.
Sukanya Samriddhi Yojana (SSY)
Under ‘Beti Bachao Beti Padhao’ campaign, the government started Sukanya Samriddhi Yojana, a small savings scheme for the benefit of the girl child.
Investment
An account can be opened by the guardian in the name of the girl child who is not more than ten years on the account opening date. Normally two accounts are allowed to be opened in the name of two girls but in special cases, a third account can also be allowed for three girls. The SSY account can be opened in a post office or bank. An account can be opened with a minimum of Rs 250 and the minimum yearly contribution is also Rs 250.
Lock-in period
The lock-in period is 21 years but partial withdrawals up to 50% of the preceding year balance are allowed when the account holder attains an age of 18 years for the purpose of education or marriage only. There are other leeways to withdraw prematurely like for medical purposes etc subject to added conditions.
Returns:
The interest to be paid on these accounts are decided by the government, the scheme is currently fetching 8.5% per annum.
Taxation
Investment into this scheme is exempt from any taxes as in the case of PPF.
Conclusion
This is a good safe option for saving for girl children’s education and marriage but as it is a debt product with long term maturity, it is suitable for very risk-averse investors. Other investors should look at combining SSY with other options like ELSS according to their risk appetite to maximize their returns.
National Pension System (NPS)
The NPS is a voluntary contribution pension scheme devised by the government to provide social security and to inculcate in citizens the habit for retirement savings. The tax benefits provided is to encourage people to save for their old age fund requirements and pension.
Investment
Any individual between the age of 18 and 60 can start investing in the NPS scheme by opening an account. The main advantage of NPS is that it provides a scope of saving extra Rs 50,000 over and above Rs 1.5 lakhs available under section 80C. It is a long term investment product where maturity proceeds are awarded at the age of 60. The entire accumulated corpus can’t be withdrawn, 60% of the corpus is allowed to be taken as lump sum while the remaining 40% of the corpus has to be mandatorily used to buy an annuity.
Lock-in period
The maturity of the investment happens after the investor attains the age of 60.
Returns
There are different asset allocation among debt and equity available to subscribe by the investors. The returns depend on the choice made; the more aggressive funds with more risk tend to give more returns while safer funds returns are lower. Broadly returns have been in the range of 9%-12% per annum.
Taxation
The government has made the withdrawal from NPS on retirement tax-free. According to the current rules, 40% of the total accumulated corpus utilized for the purchase of the annuity is already tax exempted. And out of 60% of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40% is tax exempt and balance 20% is taxable. Now, according to the new rules, the whole 60% kitty on withdrawal will be tax-free. The annuity received after retirement will be taxed as regular income.
Conclusion
The NPS is managed by many professional fund managers and it offers investors the choice of different type of asset allocation. The recent changes in taxation of the matured amount made by the government shaped this scheme to be quite attractive. But investors should know that 40% of the corpus has to be parked in the annuity which traditionally has given low returns at times lower than inflation rates.
Five Year Fixed Deposits
The fixed deposits are safe investment products and investors looking for safety rather than returns can go for such investments.
Investment
Tax saving fixed deposits can be done from any bank public or private except co-operative and rural banks. An individual or HUF can avail tax benefits up to RS 1.5 lakhs through these instruments. Post office time deposits of five years are also eligible products.
Lock-in period
No withdrawal or loans against these FDs are allowed during the lock-in period of 5 years.
Returns
Different banks quote different rates and so one needs to get acquainted by the rates offered by various banks. The recent rates are roughly between 6.8% and 8.25%. Senior citizens are offered some extra (around 0.50%) rate of return.
Taxation
Interests earned are taxed as per the slab rate of the individual and TDS is applicable.
Conclusion
Fixed deposits are options for investors looking for a safe investment option with a time horizon of 5 years. The lock-in period of five years is lowest for debt products but investors should be careful as taxation of interest, especially if one happens to be in the highest tax bracket, could significantly lower the returns.
ULIPs (Unit Linked Insurance Plans)
ULIP is a type of hybrid insurance product which combines investment and insurance features in a unified investment scheme. A part of the invested amount goes for risk cover (Life Insurance) while the remaining is invested in the fund selected by the individual. The investors have a choice to choose from a variety of funds with different asset allocation towards equity and debt. The investments in ULIPs can be claimed for tax saving purposes up to a maximum of Rs 1.5 lakhs.
Investment
Investors willing to invest in ULIPs can do so by buying a plan through financial advisors, banks & Insurance brokers. The minimum investment to be made in any ULIP scheme depends upon the type of plan chosen; there are many different plans on offer in the market.
Returns
Depending upon the choice of fund chosen an aggressive fund can return 9%-12% while debt funds can return 6% -9%. Returns are market linked.
Lock-in period
The investments in ULIPs are locked in for 5 years but taking out before the maturity of the plan just after the end of 5 years may be disadvantageous.
Maturity
The maturity period maybe 15 years or 20 years or even more, it depends upon the plan chosen.
Taxation
Maturity value is tax-free and so is the surrender value after the mandatory lock-in period. Internal switching from one fund to another is allowed and is also tax-free.
Conclusion
ULIPs’ risks depend mainly on the choice of fund chosen an equity oriented fund one with high equity exposure will be riskier than a debt-oriented fund. The costs associated with ULIPs could be quite high as compared to other products and so investors should be cautious for the same. The investors having term plans should avoid this product and choose ELSS instead.
Traditional Insurance
This is one of the most traditional investment vehicles opted by the people in India; insurance plans include endowment plans, whole life policy or money back policy. They are also a mix of investment and protection but fail at both. The returns are abysmal in the range of 5% while the life protection given is usually inadequate.
Investment
Insurance products can be directly bought from insurance companies, their authorized agents or from banks, post offices and through online mode. The minimum investment varies according to the type of product selected. Premiums paid up to Rs 1.5 lakhs in a year are eligible under 80C for tax benefits.
Returns
The return could be anywhere between 4%-7%.
Lock-in period
The insurance plans have generally lock-in periods of 5 years but withdrawal before maturity can have significant loss of the returns. Some policies even allow surrendering before 5 years but the residual amount paid could be quite lower than premiums paid.
Maturity
The maturities of these policies are subject to the terms of the plan bought. Mostly policy terms are 20 years to 30 years.
Taxation
The corpus generated at maturity is completely tax-free; in the event of the death of the policyholder, the death benefits are also tax-free.
Conclusion
Traditional insurance plans are deficient products for wealth creation or risk protection. It is better to get full coverage of risks through term plans at a lower premium and invest any surplus in other suitable product. Premiums paid towards term plan are also tax deductible under section 80C.
National Savings Certificates (NSC)
The NSC is also a fixed income product that has a sovereign guarantee and is quite popular among investors.
Investment
The investment can be made through a post office either individually, jointly or in the name of a minor. Though there is no limit for the amount of investment to be made tax benefits of a maximum Rs 1.5 lakhs is available under 80C.
Returns
The rate of return is 8% per annum compounded annually.
Lock-in period
The minimum lock-in period is 5 years.
Maturity
The certificates are available for two different maturities for five years and ten years.
Taxation
The interest earned is taxable.
Conclusion
One of the biggest features of NSC is that interest earned from the second year until the fourth year, for a five year NSC, can also be shown in the investments for respective years under section 80C and tax benefits can be claimed against that interest.
Health Insurance
The prudent financial planning strategy focuses on risk cover as a priority, therefore taking life insurance and health insurance is paramount before any other investment is made. The income tax laws also emphasize the importance of taking health insurance by providing deductions for investment done in such insurances. The section 80D of the income tax provides the tax benefit for the health insurance taken for spouse or children up to a maximum of Rs 25,000. Health insurance premiums paid (up to Rs 25,000) can also be deducted (as in the case of 80C instruments) from the total income to arrive at taxable income.
Moreover, health insurance taken for parents over the age of 60 is also eligible for deductions for premiums paid up to Rs 50,000. Hence an individual below 60 years can claim deductions of maximum Rs 75,000 by taking health insurance for self, spouse, children and parents. The point to note here is that parents need not be dependent on the said individual.
Apart from making investments in the discussed instruments, there are many provisions in the income tax laws as mentioned in the table below which can be used to lessen the total tax burden. Income Tax laws provide the provisions for certain expenses like Principal and interest payments on home loans, interest payments on education loans, children’s tuition fees etc to be adjusted to gross income to lessen the burden of taxes on Individuals.
| Financial Product | Lock in period | Expected Return | Taxation |
| ELSS | 3 years | 12%-15% | 10% of the profits above 1 lakh |
| ULIPS | 5 years | 9%-12% | Tax-free |
| Traditional Insurance | 15 years or more | 4%-6% | Tax-free |
| PPF | 15 years | 8% | Tax-free |
| EPF | Till the Age 58 | 8.55% | Tax-free |
| SCSS | 5 years | 8.60% | Tax-free |
| SSY | 21 years | 8.50% | Interest subject to taxes |
| NPS | Till the Age 60 | 9%-12% | Annuity incomes are taxed. |
| Fixed Deposits | 5 years | 6.8%-8.25% | Interest subject to taxes. |
| Health Insurance | NA | NA | Tax-free |
| Deductions Allowed Under Various Sections of Income Tax Act | ||
| Section | Description | Maximum Limit (Rs) |
| Sec 80C | Investment in Approved Schemes | 1,50,000 |
| Sec 80CCD(1B) | Investment in NPS | 50,000 |
| Sec 80D | Medical Insurance | 25,000 to 1,00,000 |
| Sec 80DD | Medical Treatment of Disabled Dependent | 75,000 to 1,25,000 |
| sec 80 DDB | Medical Expenditure Either for Self or Dependent for Specific Ailments | 40,000 to 1,00,000 |
| Sec 80E | Education Loan Interest | Actual Amount Paid |
| Section 24 | Home Loan Interest | Up to 2,00,000 |
| Sec 80 EE | Home loan interest over Section 24 | 50,000 |
| Sec 80GG | House Rent (If HRA not Part of Salary) | 5000 per month |
| Sec 80 TTA | Interest on Savings Account | 10,000 |
| Sec 80TTB | Interest on Deposits made by Senior Citizen | 50,000 |
| Sec 80 U | Deductions for Disabled Person | 75,000 to 1,25,000 |
(The above article was written by Vikas Sharma, CFP, Co-Founder & CEO, The Logical Advisor and the same was published in the March-April 2018 edition of Financial Planning Journal)
Vikas Sharma, CFP®, is a first-generation purpose-driven entrepreneur with over 19 years of experience in financial services, personal finance, and the advisory space. He is a Certified Financial Planner, an IIM Calcutta Executive Alumni, and holds an MBA in Finance and a Postgraduate qualification in Financial Planning.
Currently, Vikas is the Co-Founder & CEO of The Logical Advisor (TLA Academy Pvt. Ltd.) and Goalchi Capital Solutions LLP, where he integrates life, purpose, values, and money to create meaningful financial journeys.
He has worked with a leading Asset Management Company, mentored 1,500+ IFAs and Relationship Managers across India, and educated 10,000+ investors through Financial Wellness programs. His work has consistently focused on reshaping advisor and investor behaviour to enable sustainable success.
Vikas also coaches and mentors financial advisors nationwide, helping them build purposeful and successful careers.
