9 Best Tax-Saving Instruments and Their Returns

The Indian capital market contains numerous investments that can offer high returns to investors. For example, you can invest in stocks that offer you good returns but can force you to pay tax on the profit based on the period during which you sell them. However, some investors do not focus on earning the highest returns from their investments but use the eligible tax deductions provided by the Income Tax Act or the Indian government to lower their taxable income and save on paying a high amount of tax.

If you are looking to invest for the purpose of saving tax, you can consider investing in the best tax-saving instruments in India. This blog will help you learn about the ten best tax-saving instruments with their return potential so that you can amplify your tax savings.

• Tax liability refers to the total amount of tax that an individual or entity is legally required to pay for a financial year.
• They can reduce their taxable income by claiming tax deductions on certain investments.
• Common examples include the Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Pension System (NPS), and tax-saving fixed deposits.

Here are the top ten best tax-saving investment instruments in India:

Equity Linked Saving Scheme (ELSS)

ELSS is a type of mutual fund that invests primarily in equities, offering the potential for higher returns. As they invest at least 80% of the capital in stocks, the return potential is generally higher than other investment instruments. Investments up to Rs. 1.5 lakh in ELSS qualify for deductions under section 80C.

Public Provident Funds (PPF)

The Public Provident Fund is a long-term savings scheme backed by the Indian government. It pays regular interest to the account holders on the balance amount. Contributions up to Rs. 1.5 lakh in a financial year qualify for a deduction under section 80C. The interest earned and the maturity amount are tax-free.

Senior Citizen Savings Scheme (SCSS)

The Senior Citizen Savings Scheme (SCSS) is a savings scheme for senior citizens over 60 years of age. Investments up to Rs. 1.5 lakh qualify for deductions under section 80C. The interest earned is taxable, but the scheme offers a higher interest rate compared to other fixed-income options.

Sukanya Samriddhi Yojna (SSY)

Sukanya Samriddhi Yojana (SSY) is a scheme offered by the Indian government as a savings scheme for single girl children in India. Under the scheme, tax deductions up to Rs. 1.5 lakh on the contribution amount is provided under section 80C. The interest and maturity amounts are also tax-free.

Tax Saving Fixed Deposits

Tax saver fixed deposits are fixed-income instruments that are designed to offer tax benefits to investors. Although the interest earned is fully taxable, contributions up to Rs. 1.5 lakh are eligible for tax deduction under section 80C.

National Pension Scheme

NPS is a government-backed retirement savings scheme that allows individuals to save for retirement. Investors can claim a tax deduction of up to Rs. 1.5 lakh on the contribution amount under section 80C, with an additional deduction of Rs. 50,000 available under Section 80CCD(1B).

National Savings Certificate

NPS is a fixed-income investment scheme offered by the Indian Post Office which provides regular interest to investors. Investments in NSC up to Rs. 1.5 lakh are eligible for tax deductions under section 80C.

Unit Linked Insurance Plans (ULIP)

Unit-linked insurance plans are unique investment instruments that combine the features of insurance and investments for earning returns. Premiums paid are eligible for tax deductions under section 80C up to Rs. 1.5 lakh. The maturity amount is tax-free under section 10(10D) if the policy is held for more than five years.

Life insurance

Life insurance plans provide financial protection against any eventuality to help secure a financial future. Premiums paid for life insurance policies are eligible for deductions under section 80C up to Rs. 1.5 lakh. The maturity proceeds are tax-free under section 10(10D) if conditions are met.

Every earning individual and entity earning above a set threshold is required to pay taxes every year. However, the Indian government and the Income Tax Department allow individuals and other eligible entities to save tax by investing in some tax-saving instruments. The contributions or spending on such tax-saving investment instruments are offered as a tax deduction to a certain limit, which can significantly lower the taxable income and result in paying a lower tax amount.

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