As an investor, you’re probably always on the look out for those investment opportunities that can earn you the maximum of returns, minimize risks and increase stability of your portfolio. Besides these key factors, you should also look for the savings on the taxes available through tax saving instruments. There are various such instruments available in India today and the money you invest in them is tax deductible. This means that you can deduct these investment amounts from your net income before calculating the tax you must pay. However, when it comes to the interest you earn on these investments, some are taxable and some are completely tax-free. Some of these options are–

Tax-free Interest Instruments

  1. Employment Provident Fund or EPF–If you are the employee of a company earning a regular salary, your company probably pays a section of your salary into the EPF. According to the law, your company must pay a mandatory 12% of your salary into this fund but the voluntary contribution can be higher than that. Upto  ₹1 lac of these contributions are deductible from your taxable amount. Further, you need not pay taxes on the interest you earn on the entire amount contributed to the fund.
  2. Public Provident Fund or PPF–Similar to the EPF, you can invest amounts of up to ₹1 lac each year into the PPF account. Not only can you earn an interest of 8.9% but you can also claim a tax deduction. Similar to EPFs, the interest you earn is also nontaxable.
  3. Equity Investments–Any amounts you invest in mutual funds are eventually invested in stock and shares. Thus, the amount you invest in these equity-related investments can be deducted when calculating your tax. Any returns you earn on them do not incur any taxes.
  4. ULIPs–This is another form of investment that is also linked to equity. You can invest up to ₹1 lac every year and claim a tax deduction. When redeeming your investment, you won’t need to pay tax on the returns.
  5. Health Insurance–The investments you make to protect your health can also be deducted from the taxes you pay. This limit is fixed at  ₹15,000 of premiums with an additional limit of ₹15,000 when you buy health insurance for your parents that are aged below 60 years. Senior citizens are eligible for an exemption of ₹20,000 on premiums.

Taxable Interest Instruments

  1. National Savings Certificates or NSCs–You can invest in NSCs for 5 years or 10 years and earn interest at rates of 8.4% or 8.7% respectively. And the investments you make up to ₹1 lac per year can be deducted from your tax return. However, the interest you earn can be taxed.
  1. Senior Citizens’ Savings Scheme or SCSS–Citizens over 60 years of age can invest in this very lucrative investment channel. You can earn an interest of 9% each year on your deposits. You can open multiple accounts but the total amounts you invest in these accounts must not be more than ₹15 lacs. Do remember, though, that there are certain conditions you must abide by on your withdrawals. The interest you earn on redemption is taxable.
  2. Infrastructure Bonds–If you want to invest in infrastructure bonds, the law allows you an additional exemption on ₹20,000/- on the deductible amount.
  3. National Pension System or NPS–If your age is between 18 and 55 years, you can invest up to  ₹1 lac each year in a tier-1 NPS account. The company you work in can also contribute to this fund for you. In both cases, you can deduct this amount from your income when calculating the payable tax. However, there are certain conditions applicable. For instance, you must invest a minimum of ₹6,000 and you cannot withdraw from this account until you are 60 years of age. You will need to pay taxes on the interest you earn.
  4. Bank Fixed Deposits–The investments you make in a Fixed Deposit Scheme for 5 years is deductible under the law. But, the interest you earn on disinvestment will incur taxes. There are also certain terms and conditions. For instance, the bank is question must be a scheduled bank and the scheme should be notified.
  5. Post Office Time Deposit or POTD schemes–You can invest in these schemes for a 5 year period and claim tax deduction. But at the time of maturity, you will have to pay the applicable tax on the interest you earn.
  6. NABARD rural bonds–You will incur taxes on the interest you earn.
  7. Life Insurance–Insurances are a good investment option can you buy policies in your own name, your spouse’s name or in the name of the kids that are dependent on you. You can claim deductions on premiums up to ₹1 lac on the policies you buy. This rule is applicable on the term insurance and cash-back endowment plan you buy. While the benefits you earn on the policies is not taxable, if you earn any interest on these deposits, you need to declare them as taxable income.
  8. P2P Loans–While there are no regulations on P2P loans, you can earn an interest of 16% on your lending. However, these returns are taxable and your net earnings are likely to be around 12.8%.

Comparison of Interest Rates

Name of the Investment Instruments Rates of Interest They Earn
Employment Provident Fund or EPF 8.75%
Public Provident Fund or PPF 8.7%
National Savings Certificates or NSCs5 years

10 years

8.4%8.7%
Senior Citizens’ Savings Scheme or SCSS 9%
Infrastructure Bonds Between 7.5 and 8.25%
Equity Investments No assured rates
ULIPs No assured rates
National Pension System or NPS Variable in the public and private sectors but begin at 9.75%
Life Insurance NA
Health Insurance NA
Bank Fixed Deposits 8.5% to 9.10% (varies from bank to bank)
Post Office Time Deposit or POTD schemes 8.4%
NABARD Rural Bonds 8.5%
P2P Loans 16% and 12.8% after taxes

To read more informative articles on income tax, please visit: Lending Chaupal Tax Resources

For or  more information on reducing income tax , please read the following articles:

  1. http://businesstoday.intoday.in/story/savings-financial-year-end-income-tax-declaration-save-tax/1/22676.html
  2. http://businesstoday.intoday.in/story/income-tax-deductions/1/21137.html