Saturday, October 31, 2015

Tax Saving Instruments and Investment for salaried employees In India

Tax Saving Schemes for salaried employees India
As the financial year proceeds to ends many of my colleagues and friends started thinking of about tax saving though I have always suggested them to do it in a planned way from the start of the year it never happened. Since we all know that we can save up to 1 lac under Section 80C of the Income Tax Act and there are lots of tax saving scheme available.

Here are top 4 ways to invest your 80C investments for tax saving:
1. Life insurance premium e.g. LIC
2. Buy ELSS mutual fund e.g. Birla Sun life Tax Saver or ICICI Prudential Tax Saver
3. Tax-saving fixed deposit
4. Buying National Saving Certification NSC
5. Invest in Sukanya Samriddhi Yojna if you have a daughter, see here to learn more

1. Investment in Life Insurance Premium:

Life insurance not only provide life cover but also provide tax saving, the premium paid toward LIC comes under Section 80C and can be deductible from your income based upon your premium amount. I think Life Insurance one of the best tax saving way to enjoy tax deductions on income tax and wealth tax. It doesn't necessarily LIC it could be other insurance product also, but that has to come under 80C.

2. Investing money in Equity Linked Saving Scheme (ELSS):

I come across this schemes around 2006 and from that I believe this is one of the best tax saving scheme, there are many tax saving schemes but none has the potential of offering interested ELSS can achieve since Equity as an asset class has potential to beat inflation and always gives better returns on the long run. Also instead of spreading investments across different tax saving schemes such as PPF, ELSS, NSC and infrastructure bonds, you can now invest the entire limit of Rs. 100,000 available under Sec 80C in ELSS.

Here are some of the important features of ELSS

  1. The investments under this type of tax saving scheme are subject to a lock-in period of 3 years and, as per the Finance Act 2005, are allowed the benefit of income deduction up to Rs. 1,00,000.
  2. ELSS available in both Growth and Dividend mode, I prefer dividend mode which results in some realized gain as a form of Dividend.
  3. ELSS offers the benefits of tax saving and capital gains.
  4. Flexibility to Invest in small amounts through a Systematic Investment Plan or SIP, this you won't get on other tax saving scheme.
  5. Lock-in for three years prevents unnecessary withdrawals and allows your money to grow over a period of time.
See here to learn more about Equity linked Saving scheme or ELSS.

3. Opening Tax Saving Fixed Deposit with public or private banks.

Almost all the bank offer tax saving fixed deposit which has fixed tenure of 5 years and offer interest rate up to 8% since Fixed deposit is a relatively secure investment, if you have low-risk profile and avoid to take risk of losing principal in worst case (in case you are investing in ELSS) you can go for this option, here are some features of tax saving FDs
  1. Fixed tenure of 5 years. Also, you can not break tax saving fixed deposit before maturity.
  2. You can only invest up to Rs. 1 Lakh in the tax saving deposit in a single financial year starting from April-March.
  3. Bank will issue a Fixed Deposit Receipt that shall be the basis of claiming tax benefit; you may need to submit this as part of your income tax return filing.
  4. Term deposit under this scheme cannot be pledged to secure a loan.
See here to learn more about fixed deposit investment.

4. Investing amount in National Savings Certificate (NSC):

This is very reliable and time tested tax saving scheme. The interest of past NSCs is reinvested every year and can be added to the Section 80 limit.
1. Interest - 8%
2. Effective interest rate - 8.16 (semi-annually compounded)
3. Maturity period is 6 years. No premature encashment is permitted in the normal course.
4. Min Amount - 100
5. Max amount - no limit
6. Tax breaks - section 80C deduction.

Here is a nice table of various tax saving instruments which allows tax saving under section 80C:
Tax saving Instruments for Salaried employee India

These are some of the most widely used tax saving schemes, but apart from these there are other tax saving options also available e.g. Public Provident Fund or PPF, Post office Schemes etc. There are a couple of more options where you can invest money and claim tax benefits like 20K in infrastructure bonds, many companies like L& T offers company fixed deposit for such bonds, you can also open them online if you any DMAT account like ICICI bank or HDFC bank. PPF is another good option where not only investment is tax-free but also returns and maturity amount is exempted from tax, the only problem with PPF is that you can invest up to 100K INR and locking period is very long, 15 years. You can not withdraw money from PPF before 15 years.


  1. What are the tax saving options for NRI who is earning Income in India, like income through fixed deposit interest, income earned on dividends of stocks and by selling Stocks i.e. long term capital gains and rental incomes ? Can I use to open Tax Saver deposit on my NRE or NRO Account?

  2. Searching options to save tax the smart way? The schemes available under Section 80C is useful for tax saving. Section 80C is the best tax saving deduction. I properly invest my money in different schemes and now i enjoy the tax benefits and earn more salary with tax saving.

  3. All tax saving schemes are returning negative returns now days : 3 years locking of fund in tax saving equity mutual fund is giving negative return. Best thing is to just use them for tax saving purpose, which means invest in funds which are giving dividends and get your 50% money out from the fund in few months. this way you not only get your money back but also save some money on income taxes.