Investing is essential for building wealth and combating inflation, but the fear of risks and potential tax liabilities often holds people back. Fortunately, certain investment instruments not only offer tax benefits but also provide steady returns, helping in wealth creation while minimizing risk. In this article, we'll explore three tax-saving investment options that can generate tax-free income, ensuring that your investments work efficiently for you.
Overview and Benefits
The Public Provident Fund (PPF) is a long-standing favorite among Indian investors due to its combination of safety and attractive returns. The interest rate on PPF is revised quarterly by the government, and as of the most recent update, it stands at 7.1% per annum. PPF investments are ideal for those seeking a risk-free, long-term savings option. The account has a 15-year maturity period, with the option to extend it in blocks of five years, making it a flexible choice for those planning their financial future.
Tax Advantages
PPF falls under the Exempt-Exempt-Exempt (EEE) category, meaning the amount you invest, the interest earned, and the maturity proceeds are all exempt from tax. Additionally, contributions to the PPF are eligible for a deduction under Section 80C of the Income Tax Act, up to a maximum of Rs 1.5 lakh per financial year.
How to Open a PPF Account
Opening a PPF account is straightforward and can be done through any bank or post office. For HDFC Bank customers, the process is simplified and can be completed online. Once the account is set up, you can start making contributions and benefit from the tax savings and the steady returns offered by PPF.
Overview and Benefits
The Employee Provident Fund (EPF) is a retirement savings scheme mandated by the government for salaried employees. While the standard contribution is 12% of your basic salary, you have the option to contribute more voluntarily through the Voluntary Provident Fund (VPF). The interest rate on EPF is typically higher than most fixed deposits, making it an attractive investment for risk-averse individuals.
Tax Implications
Effective from April 1, 2021, the interest earned on EPF contributions exceeding Rs 5 lakh per annum will be taxable. Despite this, the EPF remains a highly competitive investment option due to its relatively high-interest rates, which continue to be favorable even after tax.
Maximizing Returns with VPF
For those looking to maximize their tax-free returns, contributing to the VPF can be beneficial, as long as the contributions remain within the tax-exempt limit. This allows you to earn higher interest on your savings while still enjoying tax benefits under Section 80C.
Overview and Benefits
Unit-Linked Insurance Plans (ULIPs) offer a unique blend of insurance and investment. A portion of the premium paid towards a ULIP is allocated to life insurance, while the remaining amount is invested in equity or debt funds, depending on the plan chosen. This dual benefit makes ULIPs an attractive option for those looking to secure their family's future while also investing for growth.
Tax Advantages
ULIPs provide tax deductions on the premium paid under Section 80C, up to Rs 1.5 lakh annually. Additionally, the maturity proceeds are tax-free, provided the annual premium does not exceed Rs 2.5 lakh for policies issued after February 1, 2021. This makes ULIPs a tax-efficient way to invest, especially for long-term goals.
Considerations
While ULIPs offer tax benefits and potential market-linked returns, it’s important to carefully evaluate the charges associated with the plan. Comparing different ULIPs and understanding the allocation of premiums can help you make an informed decision that aligns with your financial goals.
Overview and Benefits
The Sukanya Samriddhi Yojana (SSY) is a government-backed savings scheme designed to promote the welfare of the girl child. It offers one of the highest interest rates among small savings schemes, currently around 7.6% per annum, making it a highly lucrative option for parents looking to secure their daughter’s future.
Tax Advantages
Like the PPF, the SSY falls under the EEE category, ensuring that your investment, the interest earned, and the maturity amount are all exempt from tax. Contributions to the SSY are also eligible for deductions under Section 80C, up to Rs 1.5 lakh annually.
Opening an SSY Account
Parents or guardians can open an SSY account in their daughter’s name before she turns 10 years old. The account can be maintained until the girl turns 21 or gets married after the age of 18. HDFC Bank offers an easy process to open an SSY account, ensuring that your savings for your daughter’s future are both secure and tax-efficient.
While various instruments could offer you steady returns, look for those that also help you earn tax-free income. Investing in such instruments will not just increase your wealth gradually but also help you reduce your tax liabilities.
Under Section 80C of the Income Tax Act, 1961 you can save tax by investing in Tax saving Fixed Deposit. Calculate using FD calculator.
* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.