When you undertake prudent financial planning, you will find various strategic investments you can make to save on tax. Different sections of the Income Tax Act, 1961 offer tax deductions, exemptions, and benefits for different investments. Let’s explore some of the best tax-saving investment options under three important sections of the ITA.
One of the go-to tax-saving tools for most people is section 80C. This section allows for deductions of up to Rs. 1.5 lakhs per year. There are various investments that are eligible under this section such as tax-saving mutual funds like Equity Linked Savings Scheme (ELSS), pension plans like the National Pension System (NPS), life insurance policies like term insurance and Unit-Linked Insurance Plan (ULIP), Public Provident Fund (PPF), fixed deposits, and more.
Here are some of the tax-saving investment options you can consider under section 80C:
- ELSS mutual funds
ELSS funds are the only tax-saving mutual funds out there; no other type of mutual fund offers a tax benefit. ELSS mutual funds are equity-oriented and primarily invest in the stocks of companies. They come with a lock-in period of three years, which is one of the shortest amongst other tax-saving investments. Another advantage of ELSS funds is that because they are equity-oriented, their expected returns are also higher at around 12% to 15%.
- National Pension System
NPS is a pension scheme offered by the government as part of a social security initiative. By investing in NPS, you undertake retirement planning while also saving on tax. The lock-in period of NPS is until retirement – age 60 or above. The expected NPS returns are about 8% to 10%. In addition to the tax deduction of Rs. 1.5 lakh under section 80C, NPS investment also offer tax deductions under other sections such as 80CCD(1), 80CCD(1B), and 80CCD(2).
ULIP combines the benefits of two different financial products – insurance and investment. A part of the premium goes towards the life insurance component while the rest is invested in funds such as equity funds, debt funds, and balanced funds, depending on your financial goals and risk tolerance. ULIPs come with a 5-year lock-in period and offer returns of around 8% to 10%.
Section 80D allows for deductions on premiums paid for health insurance policies. You can claim this deduction for health insurance policies you buy for yourself, your spouse, your children, and your dependent parents.
The deduction you can claim is up to Rs. 25,000 a year. In the case of dependent parents, you can claim an additional tax deduction of Rs. 25,000. This limit is increased to Rs. 50,000 if your parents are senior citizens.
You can also claim this deduction for the premium you pay for the health insurance riders in life insurance policies. For instance, if you buy a term insurance plan with a critical illness rider, then for that you can claim a deduction under section 80D.
Under section 10(10D), any sum assured you receive from a life insurance policy either as a maturity benefit or a death benefit is exempt from tax. This is also applicable for any accrued bonus on your life insurance policy as well as the returns earned in a ULIP policy. This covers various types of life insurance policies such as term insurance, ULIP, endowment plans, and more.
However, keyman insurance or insurance offered by an employer is not eligible under section 10(10D). Moreover, the premium paid in a year should not exceed 20% of the sum assured for policies purchased before 1st April 2012 and 10% for policies purchased on or after 1st April 2020. This 10% limit can be increased to 15% for policyholders who suffer from an illness or disability as specified under section 80U or section 80DDB.
The important thing to remember about all these tax-saving investment options such as ELSS funds, life insurance, health insurance, NPS, etc. is that their primary purpose is not to save on tax. They are each designed to help you meet specific financial goals such as capital appreciation, securing your family’s financial future, building a retirement corpus, etc. The tax deductions and exemptions are the secondary benefits of these investments. Hence, adding these instruments to your investment portfolio is advantageous for more reasons than one.