Top 5 Tax Saving Instruments and Investment for Salaried Employees In India

As the financial year proceeds to end, many of my colleagues and friends started thinking 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 there are lots of tax saving schemes available.

Here are the 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

5 Best Tax Saving Schemes for salaried employees India

Here are the top 5 tax saving schemes for Indians, both salaried and business person.

1. Investment in Life Insurance Premium

Life insurance not only provides life cover but also provides 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 is one of the best tax-saving ways to enjoy tax deductions on income tax and wealth tax. 

It doesn't necessarily LIC it could be other insurance products also, but that has to come under 80C.

If you want exposure to Equity, you can also invest in ULIP which is often linked to a mutual fund also. 

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

I come across these schemes around 2006 and from that I believe this is one of the best tax saving schemes, there are many tax saving schemes but none has the potential of offering interested ELSS can achieve since Equity as an asset class has the 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 is 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 savings 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 schemes.
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 the Equity-linked Saving schemes or ELSS.

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

Almost all bank offer tax-saving fixed deposit which has a fixed tenure of 5 years and offer interest rate of up to 8% since Fixed deposit is a relatively secure investment, if you have a low-risk profile and avoid to take risk of losing principal in the 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 deposits 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 a 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.
Features
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:

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 have 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 the locking period is very long, 15 years. You can not withdraw money from PPF before 15 years.