Tax-Saving Investment Options

For everyone earning above Rs.2.5 lakh in a fiscal, it’s mandatory to file IT returns and pay the required taxes. However, there are various sections in the Income Tax Act, 1961 that outline investment in tax-savings instruments to bring down your tax liability.

Section 80C is the most popular section through which you can claim a maximum deduction of Rs.1.5 lakh by making investments in various tax-savings instruments. Let’s learn about the various investment avenues in this section through which you can save taxes.

1. Home Loan

A home loan can be an effective tax-saving option for homeowners. In many countries, including India, the interest paid on home loans is eligible for tax deductions. Under provisions of the income tax laws, homeowners can claim deductions on both the principal repayment and the interest component of their home loan EMI (Equated Monthly Installment). These deductions not only reduce the tax liability but also encourage investments in real estate. Home loan tax benefits can significantly lower the overall cost of owning a property and make it an attractive and financially prudent option for those looking to save on taxes while realizing the dream of homeownership. However, it is important to be aware of the specific tax laws and regulations in your country or region to maximize the tax benefits associated with home loans.

2. Life insurance

The premiums paid towards your life insurance policy are eligible for tax deduction under this section. Whether you pay premiums for a term plan, endowment plan, money-back policy or a unit-linked insurance plan (ULIP), all of these qualify for tax exemption. However, note that the premium can be claimed as a deduction only in the financial year in which it has been paid.

3. Fixed deposit

Assured returns and latent to market volatility have made fixed deposits (FDs) a popular mode of investment among a majority of Indians. Though FD rates have declined of late, yet it continues to be a prudent investment avenue for conservative investors. However, remember that the interest income from FDs are not fully tax-exempt and are added to your net income and taxed accordingly.

4. Public provident fund

Another government-backed investment scheme, contributions made towards your public provident fund (PPF) are eligible for tax exemption under section 80C. PPFs have a 15-year lock-in period and withdrawals are allowed from the 7th year of opening the account. You can also take a loan against your PPF account, subject to certain conditions.

5. Sukanya Samriddhi Yojana

A scheme launched by the government of India to help build a corpus to address future needs of the girl child, investments made in the Sukanya Samriddhi Yojana qualify for tax exemption. You, as a natural or legal guardian, can open a Sukanya Samriddhi account in any post office or bank in the country. The account can be opened anytime from the birth of a girl child till she reaches 10.

6. ELSS

Equity-linked savings scheme or ELSS is an ideal investment avenue for those looking for tax benefits and capital appreciation. Among the various tax-savings instruments available under section 80C, ELSS has the shortest lock-in period of just 3 years. Additionally, being equity-linked, ELSS has the potential to generate higher inflation-adjusted returns in the long run than other asset classes.

Apart from the above-mentioned tax-saving instruments, you can also claim tax benefits on tuition fees paid under this section. Note that tuition fees paid during admission in a financial year to a registered university, school or college is eligible for exemption. This is applicable for fees paid up to two children. You can also claim a deduction on the principal amount of the EMI paid towards your home loan under section 80c.

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