Tax Saving Investment Options for Last Minute Tax Planning

In the last two weeks or so, you must have received a line of communication from your HR regarding investment declarations. Many of you must have already done your tax planning. This article is for those willing to save more on taxes by doing some last-minute tax planning.

Apparently, many people are not aware of the fact that, despite the tax deduction by your HR, the last-minute tax-saving investment made by you can get your income tax returns. For it, you must file your ITR for each financial year. Here we suggest some top tax-saving investment options that can save tax and get better returns on your investments. But before that, let’s understand the importance of tax saving:

Why Is Tax-Saving Important?

1. One of the many wise decisions you can make for your future is to make the most of your money by choosing tax-efficient investments.

2. Investing in tax-advantaged accounts can offer you some extra cash in hand and secure your financial future. 

3.  Furthermore, tax-saving instils the habit of putting aside a portion of one's earnings, thus promoting savings.

Top 7 Must-Know "Best Tax-Saving Investment Plans"

1. National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a retirement benefits system set up by the Government of India to equip its subscribers with a regular income post-retirement. The (PFRDA) is the regulatory authority that governs NPS. The scheme was formerly only available to government employees, but in 2009, it was made available to all Indian citizens. The rate of interest offered to NPS for the financial year 2021-22 ranges between 9–12% per annum, on average, for the contributions made. 

In India, the National Pension System (NPS) is a defined-contribution pension fund and enjoys the status of Exempt-Exempt-Exempt, wherein all of the corpus is tax-free (exempt) at the time of maturity (exempt) and all of the pension withdrawals are tax-free at the time of withdrawal (exempt).

 An investment of Rs. 1.5 lacs can be claimed under Section 80C of the Income Tax Act to save tax.

Save more tax by investing Rs. 50,000 under Section 80CCD (1b)

To encourage NPS investment, Section 80CCD (1B) of the Income Tax Act provides an additional deduction over and above the Rs. 1.5 lakh per financial year permitted under the Income Tax Act, Section 80C.

Consequently, if an individual taxpayer has exhausted the limit of Rs.1.5 lakh for the same financial year under Section 80C of IT Act 1961, by converting other investments eligible for deduction under the same section (other than NPS), then the contribution made to NPS can be used to claim an additional Rs.50,000 deduction under Section 80CCD (1B).

2. Equity-Linked Savings Scheme (ELSS)

The best route to enter the equity market while saving taxes is through ELSS (Equity-Linked Savings Schemes). ELSS is quite similar to other equity mutual fund scheme, but the only one that provides a lock-in period of 3 years and eligibility for tax deductions under Section 80C of the Income Tax Act of 1961. 

You can save tax up to Rs 1.5 lakh by investing in ELSS in one financial year.

Mutual Funds are launched by Asset Management Companies (AMCs), and your investments are managed by a professional fund manager. In addition, all mutual fund schemes are regulated by SEBI (Securities and Exchange Board of India). 

Here are some top-performing ELSS:

• Performance as of March 3rd, 2022
• It’s a CAGR return delivered by the funds.
• Source: MFI Explorer

ELSS is a great investment for the following reasons:

1. As compared to many other investment options under section 80C of the Income Tax Act, ELSS presents the shortest lock-in period of 3 years. 

2. You can make lump-sum investments in ELSS as well as start a SIP (Systematic Investment Plan).

3. It is a tax-efficient investment that provides an opportunity for wealth creation and possible inflation-beating returns.

3. Tax-Saving Fixed Deposit

An annual fixed deposit that saves tax is a fixed deposit where you invest a certain amount and get a guaranteed return. Tax FDs come with a 5-year lock-in period under which a tax deduction of up to Rs. 1.5 lakh is permitted under Section 80C of the Income Tax Act. Risk-averse investors who wish for guaranteed returns opt for tax-saving FDs. 

Currently, tax-saving FDs offered by Government Banks range between 5.25% and 5.40% per annum, approximately. Further interest gained from tax-saving FDs is taxable on maturity.

4. Unit-Linked Insurance Products (ULIP)

A Unit-Linked Insurance Product (ULIP) is a blend of insurance and investment protection into a single investment plan. When you buy a ULIP, a portion of your money is invested in equities, debt, or other securities when you buy insurance coverage. The premium paid for ULIP is tax-deductible under Section 80C of the Income Tax Act. ULIP does not offer a fixed rate of interest. 

Also, ULIP offers a partial window of withdrawals after the 5 year lock-in period to cater to any unforeseen financial emergencies. It offers a room full of flexibility in terms of what you wish to do with your money. Even after you've invested, you can always swap between the funds you've selected. For example, investing in equity funds at a time when the markets are booming is a wise financial option. However, in case of any unforseen crisis that causes the downfall of market, one can quite easily shoft to a relatively less risky fund which inclues mainly debt, securities etc which offers expected guaranteed returns.

5. Public Provident Fund (PPF)

A PPF is an investment scheme regulated by PFRDA (Pension Fund Regulatory and Development Authority) that provides long-term savings. Contributions made to PPF accounts are tax-deductible under section 80C of the Income Tax Act, 1961. There is a deduction limit of Rs 1.5 lakh for these deposits.

A Public Provident fund account can easily be opened in any post office or public or private sector bank, as specified by the Government of India. The interest rate offered by PPF in the year 2000 was 12% per annum and presently, in the financial year 2021-22, it is 7.10% per annum.

Risk-averse investors prefer PPF because it is centrally backed by the government. The lock-in period for PPF is 15 years. However, partially withdrawing can be done after the first six years.

6. National Savings Certificate

The NSC (National Savings Certificate) offers a fixed and assured return and also helps with income tax savings. With the provisions of Section 80C of the Income Tax Act, 1961, you can claim up to Rs 1.5 lakh in one financial year as part of a government-backed tax-saving scheme.

An NSC can be acquired at a post office. The rate of interest offered under NSC for the financial years 2021–22 is 6.8% per annum. The NSC comes with a lock-in-period of 5 years.

7. Senior Citizens Saving Scheme (SCSS)

The SCSS (The Senior Citizens Savings Scheme) primarily caters to the country's senior citizens over age 60. This long-term savings opportunity delivers a steady income stream while allowing them to save money on taxes.

An individual can avail a tax deduction of Rs. 1.5 lakh u/s 80c of the Income Tax act while using this scheme. Furthermore, if the principal amount is withdrawn by the legal successor or nominee after the account holder's death, there is no tax payable on the amount. The interest paid is quarterly, and there is no option for monthly, half-yearly, or yearly payments. The current interest rate for the financial year 2021-22 is 7.4% per annum, but it keeps changing quarterly.

Thus, investing with the right strategy can help you achieve your goals while saving taxes. To know what the best investment options are as per your needs, it is recommended to ask an expert.