Most of us realise that at the end of the financial year, we need to invest a certain amount in tax-saving investments.
The section allows deduction of the amount financed in tax-saving instruments up to INR 1,50,000 from the total income of an individual for the financial year.
Although we invest in such instruments at the end of the year, when we realise the need, we lose the return for that year. Hence, the ideal way to invest in such instruments is to invest early at the beginning of the year.
Among many tax-saving instruments available, we have picked 5 investment instruments that will help you reduce your tax burden and will help you save time, since they can be done online.
6 Best Tax-Saving Instruments of 2021
|Tax-saving Instruments||Average Return||Lock-in Period||Tax Deduction*||
Maturity Amount Taxability
|Covered Bonds structured as MLDs||9-11% from platforms like Wint Wealth||Depends on the asset structure||Based on the investment amount (plus surcharge and cess)||Capital Gains are Taxable|
|Public Provident Fund||7.10%||15 Years||Investment amount up to INR 1.5 lpa||Interest and Maturity Amounts are Tax Exempt|
|Unit-linked Insurance Plan||7% – 20% (5 years)||5 Years||Investment amount up to INR 1.5 lpa||Capital Gain is taxable if the total premium in a year exceeds INR 2.5 L|
|Sukanya Samriddhi Yojana||7.60%||8 Years (In addition to 10 Years of a Girl’s Age)||Investment amount up to INR 1.5 lpa under section 80 ‘C’ of the Income Tax Act||Interest and Maturity Amounts are Tax Exempt|
|ELSS Funds||10% – 12% (5 Years)||3 Years||Investment amount up to INR 1.5 lpa under section 80 ‘C’ of the Income Tax Act||Capital Gains are Taxable|
|Term Life Insurance||Premium amount (if such a policy is selected)||Until Death (Except for Money-back Policy)||Investment amount up to INR 1.5 lpa under section 80 ‘C’ of the Income Tax Act||Tax-free (except for a few single premium policies)|
*If it is under Section 80 ‘C’ of the Income Tax Act, the amount of INR 1,50,000 of the deduction is not individually available on each investment. If you invest in more than one instrument allowable under section 80C, the maximum amount acceptable from all the instruments will be only INR 1,50,000.
1. Covered Bonds Structured as MLDs
MLDs or market linked debentures are special tax saving instruments. And Covered bonds can be structured as MLDs.
Covered bonds are like secured bonds, but they are bankruptcy protected. Which means, even if the issuer goes bankrupt, investors have a good probability of recovering their entire investment, since they are backed by a collateral
Covered bonds are usually issued by NBFCs and banks. And now, with SEBI’s recent regulation, covered bonds can be traded on an exchange as well, without a minimum transaction amount.
According to the law, the long term capital gain which is earned from listed MLDs are taxed at 10%.
2. Public Provident Fund (PPF)
PPF is the most popular tax-saving investment instrument where you can earn returns as high as 7.1% per year it is comparatively better than fixed deposits.
This is a government backed scheme, and it has a lock-in period of 15 years which you can extend in a block of 5 years each time.
The maturity amount and the interest are both tax-free. You can open a PPF account online, but the bank will require your physical presence at least once within 30 days of opening an online account.
PPF holders can withdraw the first four years PPF balance or the last four years’ PPF contribution from the sixth year.
3. Unit-Linked Insurance Plans (ULIP)
ULIP is a unique product that offers investment benefits along with a life cover. The premium paid for ULIP is invested in the debt and equity market that will generate returns for you.
ULIPs have a lock-in period of 5 years, during which you can not withdraw your money. Moreover, its maturity amount was tax-free before the Budget 2021.
To make them in parity with mutual funds, budget 2021 brought a change in taxability. Which basically said that capital gains will be taxable if the premium in a year is more than INR 2.5 Lakhs.
4. Sukanya Samriddhi Yojana
A government-backed deposit scheme, Sukanya Samriddhi Yojana, is for girls less than ten years of age to support their educational expenses. The deposit is similar to a PPF account but offers more return than a PPF.
The lock-in period for the deposit is eight years, in addition to the ten years of girl child’s age during which you cannot withdraw your money.
The maturity amount is tax-free, and the interest earned is also exempted from tax.
5. Equity-Linked Savings Scheme Mutual Funds (ELSS)
ELSS funds could a profitable investment ideas to save taxes and get desirable returns. ELSS funds are mutual funds that invest in equity and have a lock-in period of 3 years.
They also have a return generation potential of up to 10-12%, which is on the higher side of the spectrum. However, since these instruments invest in equity, they are essentially risky.
However, the capital gains on redemption of ELSS units are taxable at 10% if the year’s capital gain exceeds INR 1 Lakh without any inflation benefits through indexation.
6. Term Life Insurance
Term life insurance policies could also be an option for you to save tax on your total income. Everybody needs a life cover, and investing in life insurance plans at a young age allows you to benefit from the low premium payout.
However, it is bit of a lengthy process as it involves medical tests to ensure your body is fit and is free from any life altering diseases. Hence, you must plan early before the financial year ends, if you want to invest your money in term insurance plans, in order to claim a tax deduction benefit.
You must also note that the maturity amount of the life insurance policies are tax-free, except for a specific single premium insurance policy.
Many other tax-saving options are allowed as a deduction under various other options, such as national saving certificate, tax-saving Fixed Deposit, new pension scheme, infrastructure bonds, etc.
However, these are the most popular tax-savings instrument that will save your taxes and offer comparatively better returns than other instruments.
The selection of the best suitable tax-saving instrument will depend on individual requirements. If you already have parked your money in an ELSS Funds, or life insurance, then you may think of selecting a different combination.
However, putting all your money in one instrument does not benefit you in the longer run. A well balanced portfolio is the key.
Hence, start early, plan wisely and select the most suitable tax-saving instrument that allows you to achieve your financial goals.