Tax Saving Investment Options

As we approach the year-end, it’s time to review the tax savings options for the individuals (especially salaried class) to save on taxes and earn some value out of the investments made. It has been seen that people generally don’t review their income structure timely and at the time of filing of returns, they realize that they missed out on deduction that could have been availed to cut on some tax liability while making investments, generally referred to as Tax Planning. Therefore, it is imperative that the tax planning is done at the beginning of the Financial Year and investments are made before the close of the Financial Year (‘FY’).

Here we are going to discuss the tax-saving investment options that are generally considered with the pros and cons of each option highlighted in the subsequent section. You may note that we shall not cover all the deductions available to individuals here but only investment options that also offer tax benefits.

1. Provident Fund (PF)

PF has been one of the options in which salaried people have not much say, however, increasing the amount of contribution to PF is possible while the company policy in respect to the same has to be seen. Employers generally tend to contribute up to 12% of Basic Pay and DA. Now, the deduction for contribution to PF (employee share) is allowed as deduction u/s 80C of the Income Tax Act, 1961 (‘Act’). Currently, the interest received on PF contribution is 8.5% per annum being quite higher than what FD or other secured options discussed later in this article.

The contribution to PF is under the EEE category i.e. exempt, however, to government has brought in an amendment to tax the amount of contribution in excess of Rs. 2.5 Lakhs in a financial year beginning FY 2021-22. Interest on such excess contribution shall also be taxable.

Further, the contribution by the employer to PF, Pension Fund, superannuation fund in excess of Rs. 7.5 Lakhs in an FY shall also be taxable. Interest, dividend, etc on such excess amount shall also be taxable.

Pros

• Secured
• Fixed Return
• One of the most preferred investment options for retirement

Cons

• Long-term investment as the funds cannot be withdrawn before 5 years (partial withdrawal) and are subject to other conditions.
• Lower returns compared to ELSS

2. Public Provident Fund (PPF)

This option is generally exercise by individuals those are self employed or outside the ambit of PF and contribution to same is eligible for deduction of 80C under the Act. Currently PPF offers a return of 7.1% per annum. Maturity proceeds are exempt i.e. Interest earned on PPF account is exempt.

Pros

• Secured
• Fixed Return

Cons

• Long lock-in i.e. 15 years
• Lack of flexibility as partial withdrawal allowed only from the 7th year.
• Lower return than the MF or PF

3. Tax Saving Fixed Deposits

The tax saving fixed deposits is also eligible for deduction u/s 80C of the Act and have maturity period of not less than 5 years. Interest received is taxable and liable to TDS deduction while amount received on maturity is amount invested hence not liable to any further taxation.

Pros

• Fixed Return
• Secured
• Medium Term

Cons

• Lower Returns
• Interest being taxable
• Lock-in period of 5 years

4. National Savings Certificate

The investment in NSC is also eligible for deduction u/s 80C of the Act. The recent NSC provides a 6.8% return per annum.

Pros
Fixed Return
Secured

Cons
Lower Returns
Interest is taxable unless re-invested

5. Equity Linked Savings Scheme (Mutual Funds)

This investment option has been a lot talked about and had been lucrative as the same offers the highest return among the segment however, the same is riskier as it invests in equity only. On average the mutual funds have offered a return of 13%-15% per annum with last year being a very good year for the stock market few funds have performed exceptionally well providing returns exceeding 25% in a year. However, one may note that the option is riskier as it totally depends on the return generated by the underlying asset, and few funds have provided returns lower than the FD. But without doubt, it offers a great advantage to earn higher returns while saving taxes but proper asset allocation is necessary. Further, since the lock-in period is less the amount can be redeemed and reinvested allowing you to not block the funds for a very long period.

Pros

• High Returns
• Lock-in of 36 months i.e. 3 years
• Taxability on the selling of funds post 3 years – Capital gains at 10% if the amount exceeds Rs. 1 Lakh (advantageous for higher-income earning individuals)

Cons

• High Risk
• May even incur loss or have no profit and loss situation
• Funds with higher expense ratios may negatively impact the capital invested

6. Unit Linked Insurance Plan (ULIP)

These options have also been considered by individuals who expect returns along with the benefit of insurance. These options are eligible for deduction u/s 80C of the Act.

Pros

• Less risky compared to ELSS
• Insurance benefit
• Exempt on maturity u/s 10(10D)

Cons

• The long term investment is generally 10 years or more
• Lower returns

7. National Pension Scheme (NPS)

This option has gained momentum in the last few years when the deduction of 50,000 a year was additionally allowed under the Act. However, the option is good tax saving investment will be seen in the long run and how much return it generates during the investment period.

Pros

• High returns
• Additional Tax benefit other than 80C
• Retirement corpus created
• The low expense ratio for fund management

Cons

• Very long investment i.e. till retirement
• Complete amount not received as exempt income on maturity only if Annuity is purchased from 40% value.

8. Housing Loan

Loan as an investment option, Really? Yes, the Housing loan offers an advantage of tax saving while allowing you to buy/build your own home which will not only be an asset but an assurance of a self-owned home that every individual plans for during the period of his/her earnings. So how does a Housing loan offer a tax advantage?

Principal amount

The amount of prepayment of the principal of a home loan is allowed as deduction u/s 80C of the Act, however, if you have other components in your 80C slab then the deduction shall be limited to Rs.1.5 Lakhs a year including all amounts.

Interest Amount

The interest on a home loan is allowed as a deduction u/s 24(b) to the extent of Rs. 2 Lakhs in case of self-occupied property. In case the property is let out then the complete interest paid shall be allowed as deduction while computing the income from house property. Additionally, the interest can be claimed u/s 80EEA of the Act to the extent of Rs. 1.5 Lakhs subject to fulfilment of other conditions.

Loss under the head income from house property can be set off against the other heads of income thereby providing tax saving. However, this option is more beneficial when in the highest slab and have already saved under other options initially. For instance, the ELSS or NSC, etc. used as investment option during initial 5-10 years of earning post which the Housing loan may be considered when sufficient corpus has already been invested for higher returns.

Pros

• Asset acquisition while saving on taxes
• Additional income tax deduction for interest paid

Cons

• Cost-benefit analysis is required as individuals may not necessarily benefit from tax savings as they may have to forego HRA deduction
• Liability incurred for long term

Now to summarize the above, we have provided table below:

Particulars	Limit of deduction	Expected Return/ Saving	Investment Period/ Lock-In	Additional Comments
PF	1,50,000 p.a. in aggregate	8.5%	Retirement or minimum 5 years	Best tax investment with higher fixed return
PPF		7.1%	15 years	Good for fixed return but long lock-in
FD		5.5% – 6.5%	5 years	Not much beneficial and option like PPF may be considered better
NSC		6.8%	5 years	In the case of diversification and fixed return, this option can be considered as has a comparatively lower lock-in period
ELSS		13%-15%	3 years	The highest return and lowest lock-in is very useful tools especially when you have a long period of the investment horizon. One of the most preferred options for young investors.
ULIP		4-7%	10 years	Low returns however providing insurance benefit, advisable to take term insurance separately and invest in other tax saving options
NPS	50,000 (Employee share)	10-12%	Retirement – 60% Annuity post retirement – 40%	Additional Tax saving a great advantage along with corpus for retirement however, a very long gestation period. Can be used as tax saving cum retirement option.
Housing Loan	Interest – 2,00,000 (SOP) Additional Interest deduction –  1,50,000	Tax saved basis the slab rate	10-20 years	It has it’s pros and cons, may be beneficial only for high income earners and this option can be planned when you have higher income slab to obtain the maximum benefit while building assets as well.

You may note that the above list may not be exhaustive and there may be other options available, however, have tried to cover the options which are mainly exercised and used.

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Disclaimer: The author does not tend to provide any recommendation and you shall consult your financial/tax advisor while making investment in line with your risk return analysis. For any queries the author can be reached at rishabh280695@gmail.com.