Tax Free Investments : Tax free bonds issued by the Indian government (up to Rs 500,000) are one of the most popular tax free investments in India that can earn you an annual return of about 8%. These bonds are eligible for deduction under section 80C.
Interest payments on these bonds are exempt from taxation under sections 10(10D), 10(23D) and 40 of the Income Tax Act, 1961 (the Act). Since these bonds can be held until maturity, they generate capital gains that are also exempt from tax, which makes them one of the most sought after tax free investments in India.
Tax Free Investments
One of the tax free investments you can make in India is in a PPF account. The Principal Pension Fund (PPF) is one of those investment products that promises to give your money back when you need it. Under Section 80C, your taxable income will be reduced by Rs 1.5 lakh for each financial year and invested as per whichever option you choose from a list of investments eligible under Section 80C.
What’s more, PPF offers you an additional deduction up to Rs 50,000 under Section 80CCD(1B). Furthermore, if you invest through SIPs in equity mutual funds or NSCs, these are also considered tax-free investments which would save your taxes upto an extent. Tax Free Investments
Public Provident Fund
A public provident fund (PPF) is a government savings plan that allows you to save money for retirement. If you make more than ₹15,000 a year, are in between 18 and 60 years old, have not taken a loan from your PPF account within six months of opening it, and hold an active bank account to deposit PPFs into, then you can get started. Interest on your PPF will be compounded annually at 8.8% per year and accrue only until the end of 12th year after which all interest is taxable.
The best part about investing in a PPF? It’s tax free! Plus, since your interest won’t compound indefinitely, that means no nasty surprises when it comes time to withdraw funds – and everyone likes a tax-free income stream. All told, PPFs give you several benefits over other investment options: tax-free returns up to ₹1 lakh each financial year; guaranteed returns; ease of transferability; flexibility with withdrawals; no minimum lock-in period; protection against inflation; and there are even lower limits if you qualify as someone below or above 50 years old. And if you don’t need access to your cash right away (like most investments), their high liquidity rates could mean superior gains for you.
Public Provident Fund vs Fixed Deposits
If you are looking for a safe and tax free investment with regular income, then both of these options fit perfectly. The only difference between them is in their maturity period. Public Provident Fund investments mature after 15 years. On the other hand, Fixed Deposits matures after five to seven years. As most investors don’t wish to wait for 15 years to get their money back, investing in Fixed Deposits is better than investing in Public Provident Fund.
However, PPF returns can be considered as assured because even if there is a risk of inflation during those 15 years, you still get an interest rate that’s higher than what banks offer on deposits and FDs. Hence, it may be worth it to invest in PPFs if your goal is more about safety than return.
National Savings Certificate
The National Savings Certificate is issued by most banks in India and can be held for a minimum period of six months to five years. It is an extremely safe investment because you are not only eligible for a government-guaranteed interest rate, but you also have flexibility to withdraw your money whenever you like.
The amount that can be invested in National Savings Certificates depends on your financial situation; if you’re a non-resident Indian, each certificate will cost you Rs 500 (Rs 200 if you are 60 or older), while Indian residents can invest up to Rs 1 lakh per year.
The best part about investing in NSCs is that they do not require maintenance—the entire amount that has been invested can be withdrawn at any time without tax penalties or consequences. Tax Free Investments
Senior Citizens Saving Scheme
The Senior Citizens Saving Scheme is a long-term investment scheme designed to encourage senior citizens in India to save and earn tax-free income. Investors can subscribe to either Senior Citizen Savings Scheme-I or II.
This plan is quite similar to other regular small savings schemes with an additional benefit of income being exempt from taxation. As per current rules, you can invest up to ₹50,000 per financial year (April 1 – March 31) under SSCI-I and ₹30,000 per financial year under SSCI-II. The returns are taxable as per your income tax slab rate.
Sukanya Samriddhi Account (SSA)
This is a long-term savings account introduced by Government of India for minors. It is basically a bank account where you deposit money until your child attains adulthood and it offers tax benefits up to Rs. 1,50,000 per year. Unlike PPF (which has a cap of Rs. 1,50,000 per year) you don’t have to lock in money for 15 years in SSA and it doesn’t come with any interest rate or maturity date unlike NSC (National Savings Certificate). The only downside of SSA over PPF or NSC is that you can deposit up to 50% amount on behalf of your kids whereas PPF and NSC allows full amount deposit.
Equity Linked Savings Scheme (ELSS)
The biggest advantage of ELSS is that it is exempt from tax. This means all gains made through ELSS are completely tax free. The capital appreciation on ELSS investment over three years will also be exempt from taxation. Tax Free Investments
A maximum of Rs 50,000 can be invested in ELSS per financial year, which can be further increased to Rs 1 lakh under Section 80C for senior citizens (60 years or above). Moreover, if you have any unclaimed dividend or long-term capital gains lying in your bank account then you can use them to invest in ELSS too. Remember, interest and dividends earned on fixed deposits are taxable under income tax laws.
So, whenever you want to make an investment out of a fixed deposit to save taxes instead of using it for consumption expenditure consider buying a fixed deposit and investing in an ELSS fund instead so that your money benefits from two major advantages: tax exemption and good returns! Also Read: Top 8 Reasons To Invest In Gold ETFs And Gold Mutual Funds Instead Of Buying Gold Coins And Bars Like 22 Karat Or Sovereigns!
Voluntary Pension Scheme (VPS)
VPS is a new scheme launched by govt. which allows you to save tax-free up to Rs.1,00,000/- in a year under section 80C of Income Tax Act. Investing in VPS allows you to invest more than Rs 50000/- in different instruments under Sec 80C including ELSS and other such tax saving instruments. Also there is no lower age limit for VPS as compared to other investment options like PPF (15 yrs), NSC (16 yrs), etc.
Post Office Monthly Income Scheme
This scheme provides an investment avenue with a decent interest rate of 7.6% per annum, however there is no tax liability on investments or withdrawals. This means you get a return on your money without having to pay any taxes. Additionally, you can withdraw your earnings anytime without any restrictions and complete security of principal amount is guaranteed by Government of India.
The downside here is that new deposits can only be made in multiples of Rs 1,000 which could be difficult for larger investments. However there are some other options which are flexible enough to let you make deposits in smaller amounts. Tax Free Investments
Unit Linked Insurance Plans (ULIPs)
Most people think of insurance policies when they hear life insurance, but if you’re looking for tax-free investments in India, a ULIP might be your best bet. A ULIP functions as an investment and life insurance policy in one; they offer higher returns than term plans, but also expose you to more risk.
That said, if you are looking for an investment that qualifies as a long-term capital gain (i.e., something that gets taxed at only 20%), a ULIP could be an ideal option. Plus, there’s no limit on how much money you can invest into a ULIP (unlike NPS), and it’s easy to switch policies when needed.