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Save on Taxes Legally with These Investment Strategies

Save on Taxes Legally with These Investment Strategies
October 03, 2022


In this policy, the investment risk in the investment portfolio is borne by the policyholder.

When it comes to planning for the future, most people rely on savings and investments. What many do not realise is that they can maximise the returns on their investment while legally saving on taxes. Most people struggle to find a way to save on taxes while also enjoying returns in the long term. If you relate to this problem, don’t worry. Here’s a look at some great investment strategies that will help you save on taxes.

Tips to Avoid Tax Legally

In 1961, the Income Tax Act was brought into effect. The Act lays down rules regarding the collection and administration of income tax. Irrespective of whether you’re an entrepreneur, a salaried individual or a professional, you must pay taxes to the government. Based on the amount you earn every year, you fall into a particular tax bracket. Every individual has to pay the government a percentage of their annual income. The percentage is decided based on the tax bracket. The Income Tax Act also lays down certain guidelines under which individuals can save on their taxes. The various deductions individuals can enjoy are outlined under multiple sections of the Act. By understanding the rules and exemptions, individuals can make strategic tax-saving investments to avoid tax legally.

Tax-Saving Investments to Avoid Tax Legally

Here are some of the best tax-saving options when it comes to investments:

  • Equity-Linked Saving Scheme (ELSS)

    An ELSS is similar to a mutual fund. It’s a good option for investors who have a high risk appetite. An ELSS can offer interest rates that are as high as 15 to 18%, so investors can enjoy high returns in the long term. Apart from the high returns, the money you invest in an ELSS can get deducted from your taxable income. Under Section 80C of the Income Tax Act, 19611, you can save up to INR 1,50,000 from your taxable income for investments made in an ELSS.

  • The National Pension Scheme (NPS)

    The NPS offers individuals the opportunity to save up for their retirement while saving on taxes. Money invested in the NPS enjoys tax exemptions under three separate sections of the Income Tax Act. Under Section 80C, money invested in the NPS, up to INR 1,50,000 per year, can be deducted from the investor’s taxable income. Under Section 80CCD (1B), investors can get an additional deduction of up to INR 50,000 per year. Additionally, when an employer contributes an amount to their employee’s NPS, it is exempt from taxes as long as the contribution does not exceed 10% of the employee’s basic salary. The NPS investment reaches maturity when the employee retires. At this time, they can withdraw 60%*of the accumulated funds. The withdrawn amount is exempt from taxes. The rest of the money has to be used to purchase an annuity.

  • Unit-Linked Insurance Plans (ULIPs)

    A ULIP is a unique investment product that provides wealth creation opportunities while providing life cover. Investors who put money in a ULIP choose where to invest their money. ULIPs fall under something known as the Exempt-Exempt-Exempt (E-E-E) category. Money invested in the ULIP, up to INR 1,50,000 per year, is eligible for tax deduction u/s 80C of the Income Tax Act, 19611. In certain cases, investors can opt to make partial withdrawals against the accumulated funds. These withdrawal amounts do not attract any taxes either. Finally, the returns that the investors earn are exempt from taxes under Section 10(10D) of the Income Tax Act, 1961 in case of policies issued before 01.02.2021 whereas in case of policies issued on or after 01.02.2021 maturity proceeds will be exempt if premium premium payable for any of the previous years during the term of such policy does not exceed Rs 2,50,000, subject to conditions as per sec 10(10D). ULIPs provide investors with the flexibility to pick their fund allocation. To maximise returns, they can switch their funds depending on market conditions.

  • Public Provident Fund (PPF)

    The PPF is a popular long-term savings and investment scheme that investors use to plan finances for their retirement. Much like a ULIP, the PPF is an E-E-E category investment. So, all contributions the investor makes are tax-deductible. Additionally, any interest accrued on the initial investment amount is also completely exempt from taxes. Finally, the maturity amount that the investor receives does not attract any taxes either. Similar to other investment plans, individuals can claim a deduction of up to INR 1,50,000 per year for investing in the PPF. Since the PPF is a government scheme, it’s quite affordable and safe. Investors can start by investing as little as INR 500 per year.

  • National Savings Certficate (NSC)

    NSC is instrument for tax saving and guaranteed returns. It is one of the best options for low risk apatite investor as it’s a government backed investment and has low risk feature. Most distinctive feature of this instrument is the fact that interest earned during 1st four years gets reinvested in NPS plan is also eligible for deduction u/s 80C in respective years in addition to initial investment.

    There are many other tax saving investment plans like tax saver fixed deposit for period of 5 years or more, Senior citizen saving scheme, subscription to government defined saving certificates etc.

Every year, individuals try to formulate the best investment strategies to work around their tax obligations. With these clever investments, you can maximise your returns and avoid tax legally. If you’re not sure about the deductions available, you can speak with a financial advisor or your accountant. They will help you make sense of the tax-saving options available to you.

Related Articles

ARN: ED/09/22/29034

* As per section 10(12A) of Income Tax Act, 1961

1 The above stated tax benefits are subject to the provisions & conditions mentioned in the existing Income Tax Act, 1961. Tax Laws are also subject to change from time to time.

The customer is requested to seek tax advice from his/her Chartered Accountant or personal tax advisor with respect to his/her personal tax liabilities under the Income-tax law.

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

Unit Linked Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, HDFC Life is only the name of the brand. The name of the company, name of the brand and name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your insurance agent or the intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.