A famous quote by legendary investor Mr. Warren Buffet: 'Someone's sitting in the shade today because someone planted a tree a long time ago.’ This highlights that investing is an ongoing and meticulous process for wealth creation with no shortcuts. However, most taxpayers do not research their investments carefully and are in a rush to meet the tax savings needed at the end of the year. We are nearing the end of the financial year 2024-25, and it is a similar situation for many taxpayers. So here we have some tax savings investment options that can help make this process easier and also help you in wealth creation in the long term.
PPF (Public Provident Fund) is a government-backed savings scheme that helps citizens accumulate funds for their retirement. It is a long-term savings scheme with an investment tenure of years that also provides tax benefits. It belongs to the EEE category of investments where the contribution, the interest earned from the investment and the corpus at the end of the investment are tax-free, making it ideal for investors looking for investments mainly for tax savings. Investments in PPF are eligible for tax deductions up to Rs. 1,50,000 under section 80C of the Income Tax Act, 1961. The government decides the interest rate on the PPF from time to time, and the current rate of interest on PPF investment is 7.1% per annum. This interest is credited to the PPF account and the corpus, along with the interest earned is tax-free upon maturity. Investors are also allowed a partial withdrawal of their investment subject to certain conditions and flexible investment amount, making it a good investment choice for risk-averse investors.
This investment option is designed specifically for senior citizens aged 60 and above, allowing them an opportunity to park their funds in a government-backed scheme and earn higher interest as compared to other fixed-income savings options. As per the amendment in Budget 2023, investors can invest up to Rs. 30,00,000 in this scheme for a tenure of 5 years (extendable up to 3 years) and earn interest at the rate of 8.2% per annum. The amount contributed to the scheme also qualifies for deduction under section 80C of the Income Tax Act 1961 for up to Rs. 1,50,000.
The National Savings Certificate (NSC) is another government-backed secure investment option offered through post offices. It is another investment designed to encourage disciplined savings among individuals while providing tax benefits. NSC currently offers an interest rate of 7.7% per annum (compounded annually) and has a maturity period of 5 years. Furthermore, investments in NSC qualify for tax deductions up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961. The interest earned is taxable, however, it is deemed reinvested, thereby making it eligible for a deduction under Section 80C in subsequent years. Investors get the accumulated corpus upon maturity, along with the interest earned during the tenure of the investment. However, the interest for the final year is subject to tax as per the investor's income slab. These benefits offered under NSC make it a suitable investment option for risk-averse investors seeking guaranteed returns and tax savings.
ULIPs (Unit Linked Insurance Plans) are a unique tax-saving investment option that combines the benefits of life insurance coverage with an opportunity to earn market-linked returns and create wealth. A part of the premium invested in ULIPs is used towards providing life insurance while the balance is invested in notified market-linked instruments like equity or debt funds, based on the investor’s preference (selected at the time of starting the ULIP investment). Premiums paid towards ULIPs are eligible for tax deductions of up to Rs. 1,50,000 per financial year under Section 80C of the Income Tax Act. Furthermore, the amendment in the ULIP investment has revised the tax exemption rules for maturity proceeds under section 10(10D) and is applicable for both the new tax regime as well as the old tax regime. As per this amendment, if the annual premium on ULIPs issued on or after 1st April 2025 exceeds Rs. 2,50,000, the maturity proceeds will be subject to capital gains tax, similar to equity-oriented mutual funds. However, if the annual premium is Rs. 2,50,000 or less, the maturity proceeds will continue to be tax-exempt under Section 10(10D).
ELSS funds are one of the most popular tax-saving investment options in India. These mutual funds invest primarily in equities, offering investors the dual benefits of potential wealth creation and tax savings. Investments in ELSS are eligible for deductions up to a limit of Rs. 1,50,000 per financial year under Section 80C of the Income Tax Act, 1961. These funds come with a mandatory lock-in period of 3 years, which is the shortest among tax-saving instruments. As the returns from ELSS funds are subject to market risks, they are a riskier investment option as compared to the options mentioned above but also have the potential to provide the highest returns in the long-term tenure of 10-15 years.
Tax-Saving Fixed Deposits are one of the oldest tax-saving investment options offered by banks and financial institutions, allowing investors to save on taxes while earning assured returns. Investments in FDs are also eligible for tax deductions up to Rs. 1,50,000 under section 80C of the Income Tax Act, 1961. These FDs come with a mandatory lock-in period of 5 years, restricting premature withdrawals. The interest rates on tax-saving FDs typically range between 5.5% and 7.75%, varying across different banks and also offer higher interests for senior citizens. Interest earned from these investments is subject to taxation based on the applicable slab rates of the taxpayers, along with TDS rules as per the Income Tax Act, 1961.
The National Pension System (NPS) is a government-backed retirement savings plan that helps individuals build financial security for their later years. People can contribute regularly to their NPS account during the tenure of the investment, creating a large savings pool over time. Investors can withdraw up to 60% of the corpus upon retirement as a tax-free lump sum, while the rest is used to buy an annuity, ensuring a steady pension income. NPS offers deductions under multiple sections of the Income Tax Act,
Up to Rs. 1,50,000 under Section 80CCD(1) as part of the overall 80C limit,
An additional Rs. 50,000 deduction under Section 80CCD(1B).
Employers' contributions to NPS are also tax-deductible under Section 80CCD(2), up to 10% of the employee's salary.
Furthermore, a recent update in the Union Budget 2025 introduced the NPS Vatsalya scheme, offering an extra Rs. 50,000 tax deduction for child welfare investments. With these benefits, NPS serves as a smart investment for long-term financial security and retirement planning.
Sukanya Samriddhi Yojana (SSY) is a government-backed savings scheme designed to secure the financial future of a girl child in India. It was launched as part of the ‘Beti Bachao Beti Padhao’ campaign and aims to encourage parents to save for their daughter's education and marriage. Parents or legal guardians can open an SSY account in the name of a girl child below the age of 10 years. The account can be opened at any post office or authorised bank branch. The minimum deposit amount is Rs. 250, and the maximum is Rs. 1,50,000 per financial year. The scheme offers an attractive interest rate of 8.2% per annum, compounded annually. The contributions made to the SSY account are eligible for tax deductions under section 80C of the Income Tax Act, and the interest earned and maturity amount are tax-free. The account matures after 21 years from the date of opening or when the girl child gets married after the age of 18.
The main purpose of investments is to secure the financial future of the family and have a comfortable retirement phase. However, life is unpredictable, and the COVID era showed how sudden losing a loved one can be. Therefore, life insurance is one of the most important investments that need to be started as early as possible to have a larger policy value at lower premiums. Life insurance provides a safety net for the loved ones by offering a lump-sum payment, known as the death benefit, to designated beneficiaries upon the policyholder's demise. Life insurance also serves as a tax-saving tool as the life insurance premiums paid are also eligible for tax deduction under section 80C up to Rs. 1,50,000. Additionally, the maturity proceeds death benefits received from these policies are generally exempt from tax under Section 10(10D). However, as per the recent amendment in the Union Budget 2025, if the annual premium exceeds Rs. 5,00,000 for policies issued on or after April 1, 2025, the maturity proceeds will be taxable. This change aims to ensure that high-value policies are taxed appropriately, aligning with the government's objective of equitable taxation.
The health costs in India have been on a steady rise for many years. This makes it important for every individual to have health insurance for themselves and their family members. The government, to encourage the adoption of health insurance, also offers tax benefits under section 80D of the Income Tax Act, 1961. Taxpayers can claim a tax deduction from Rs. 25,000 to Rs. 1,00,000, depending on the beneficiaries included in the health insurance plans. These deductions are over and above the deductions available under Section 80C, making health insurance not only a vital tool for financial protection against medical emergencies but also an effective means for taxpayers in India to reduce their taxable income.
The government has made some significant changes in the Income Tax Act, 1961, over the past couple of years. The most prominent of them have been the introduction of the new tax regime and subsequently making it the default one. The new tax regime offers practically zero tax liability on taxable income of Rs. 12,00,000 for taxpayers and Rs. 12,75,000 for salaried taxpayers. However, it does not allow the deductions mentioned under Chapter VI, including the deductions under section 80C. This makes the majority of tax savings instruments less attractive for average taxpayers who invest with the sole purpose of tax savings. So, does that mean that you should stop these investments? The answer is a big NO!
While the new regime offers lower tax rates and eliminates most deductions, tax-saving schemes like PPF, ELSS, NPS, and insurance policies provide long-term financial security, disciplined savings, and wealth creation. For example, investing in instruments like PPF, NSC, or ULIPs ensures guaranteed, tax-free returns over time. Similarly, ELSS funds help grow wealth through equity markets, which are known to provide the highest returns in the long term. Health and life insurance offer benefits beyond tax deductions, like ensuring financial stability during medical emergencies or unfortunate life events. Investments like NPS continue to provide a steady pension income during retirement, which is crucial for financial independence. Even fixed-income options like tax-saving FDs or Sukanya Samriddhi Yojana help secure your child's future.
Thus, even though these investments may not give the desired tax benefits under the new regime, they still serve as a valuable financial tool to build savings, provide retirement benefits, and offer financial protection to your family.
India is a land of paradox for being a country with high tax brackets, yet only about 3% of the population pays direct taxes. This makes investing in tax-saving instruments a dual-edged sword that can help reduce tax liabilities and contribute to wealth creation in the long term. These popular tax-saving investments can help in financial planning and help in securing the financial future. However, instead of focusing solely on tax savings, it is wise to view these schemes as essential for financial growth, security, and a disciplined approach to wealth management.
This article talks about the popular tax savings investment options that provide the dual benefit of reduction in tax liability and long-term wealth creation. Let us know your thoughts on this topic, and reach out to us if you need further information on any of these investment options.
Till then Happy Reading!
Read More: Difference between SIP (Systematic Investment Plan) and STP (Systematic Transfer Plan)
Marisha Bhatt is a financial content writer @TrueData.
She writes with the sole aim of simplifying complex financial concepts and jargon while attempting to clarify technical and fundamental analysis concepts of the stock markets. The ultimate goal is to spread vital knowledge and benefit the maximum audience. Her Chartered Accountant background acts as the knowledge base to help clarify crucial concepts and create a sound investment portfolio.
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