5 Best Tax Saving Investement Options for FY 2020-21

5 Best Tax Saving Investement Options for FY 2020-21

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Tax-saving is an important part of financial planning. An intelligent tax-planning strategy can serve the dual objective of helping individuals meet their financial goals and save tax in the process.

Here is a list of some of the best tax saving investment options and plans for 2020 that can help individuals maximize tax benefits:

Sr No.Tax Saving Investment OptionsTax Benefit Under Section
1

Life Insurance

Section 80C (Premium) Section 10(D) (Death / Maturity)
2

Pension Plans

Section 80CCC(sub-section under Section 80C)
3

Health insurance or Mediclaim

Section 80D
4

NPS

Section 80CCD
5

Tax-saving mutual funds

Section 80C Section 10(D) (Death/Maturity)

 

Tax saving instruments and sections therein :

1. Fixed deposit

You can save tax by investing in tax saver Fixed Deposits which can fetch you tax deduction under section 80C of the Indian Income Tax Act, 1961. You can claim a deduction of a maximum of Rs.1.5 lakh by investing in tax saver fixed deposits. There is a lock-in period of 5 years for such FDs and the interest earned is taxable. The rate of interest usually ranges from 5.5% – 7.75%.

2. PPF ( Public provident scheme )

Public Provident Scheme is a popular investment vehicle for saving tax. A long term savings cum investment product, you need to open a PPF account at the post office or designated branches of public and private sector banks to start with. Contributions to the PPF account earn a guaranteed rate of interest. You can claim deductions under Section 80C up to Rs 1.5 lakh in a financial year on these deposits.

3. ULIP (Unit linked insurance plan)

ULIPs are long term investment products that allow you to choose equity funds, debt funds or both. ULIPs give you the flexibility to switch between funds in sync with your financial goals. By investing in ULIPs, you can save taxes under sections 80C and 10(10D) of the Income Tax Act, 1961.

4. National Savings Certificate

National Savings Certificates are a savings bond scheme which encourages primarily small to mid-income investors to invest while saving on income tax under Section 80C. If you have a Savings account with a Bank or a Post Office, you can buy NSC certificates in e-mode, provided you have access to internet banking. NSCs can be bought by an investor for self or on behalf of minor or with another adult as a joint account.

5. Senior Citizen Savings scheme

Senior Citizen Savings Scheme (SCSS) is a government-sponsored savings instrument for individuals above the age of 60 which gives a steady and secure source of income for their post-retirement phase and offers comparatively substantial returns.

The principal amount deposited in an SCSS account is eligible for tax deductions under Section 80C of the Income Tax Act, 1961, up to the limit of Rs. 1.5 Lakh. However, this exemption is applicable only under the existing tax regime. It is not allowed if an individual chooses to file tax returns under the new system introduced in Union Budget 2020.

The interest received is, however, subject to taxation as per the applicable slab of the concerned taxpayer.

Life insurance

Life insurance plays an important role inthe individual’s financial portfolio offeringsecurity to the individual’s family in case of an eventuality. This makes it the breadwinner’s primary responsibilityto take life insurance at the earliest for the family’s security.

Life insurance, be it traditional (endowment) or market-linked (ULIP), offers tax benefits to policyholders on the premiums paid.

There are various life insurance plans like:

Regardless of its nature, life insurance plans offer tax benefits to policyholders.

Premiumspaid towards life insurance are covered under Section 80C of the Income Tax Act up to a maximum of Rs 1.5 lakhs. Proceeds on death / maturity are tax-free under Section 10(D).If policyis surrendered/terminated withinfive years, deductions claimed are added to income and taxed accordingly

  1. Term plans

  2. Endowment plans

  3. ULIPs or unit-linked plans

  4. Money back plans

Pension plans

Pension Plans is another form of life insurance. They serve a different end-objective from other insurance plans like term plans and endowment plans – which are called protection plans. While protection plans are geared to financially secure the individual’s family on his death, pension plans aim at providing for the individual and his family if he lives on.

Contributions towards pensionare covered under Section 80CCC(sub-section under Section 80C) of the Income Tax Act. The aggregate limit of deduction under all the sub-sections of Section 80C cannot exceed Rs 1.5 lakhs.

On maturity 1/3rd of the accumulated pension amount is tax free with the balance 2/3rd treated as income and taxed at the marginal tax rate. The amount is tax free upon death of beneficiary.

Health insurance or Mediclaim

Health insurance or Mediclaim as it is more popularly known, covers expenses incurred from an accident/hospitalization. Mediclaim also covers pre and post-hospitalization expenses, subject to the sum assured

Health insurance offers tax benefits under Section 80D. Insurance premium upto Rs 20,000 for senior citizens and Rs 15,000 for others is eligible for tax benefit. If the policyholder pays Rs 15,000 as premium on his own policy and Rs 20,000 for his parent, a senior citizen, he can claim tax benefit of Rs 35,000 (Rs 15,000+20,000). Maturity value is tax free for sum received under critical illness insurance policies policies

NPS

The NPS or the New Pension Scheme is regulated by the Pension Funds Regulatory and Development Authority – PFRDA. Any citizen of India over the 18 – 60 years age bracket can participate in it. It is extremely cost effective since fund management charges are low. The fund managers manage the money in three separate accounts having distinct asset profiles viz. Equity (E), Corporate bonds (C) and G Government securities (G). Investors can choose to manage their portfolio actively (active choice) or passively (auto choice).

Contributions made to the NPS are covered under Section 80CCD of the Income Tax Act. The aggregate limit of deduction under this section along with Sections 80C, 80CCC cannot exceed Rs 1.5 lakhs.

Given the range of options, NPS is particularly useful for individuals, with varying risk appetites, looking to set aside money towards retirement.

Tax-saving mutual funds

Investments in tax-saving mutual funds, also known as equity-linked savings scheme (ELSS), qualify for tax benefits. Tax-saving mutual funds invest in stockmarkets, among other assets, and are more suited for investors with medium to high risk appetite. Investments are locked in for three years.

Investments towards tax-saving mutual funds are covered under Section 80C of the Income Tax Act up to a maximum of Rs 1.5 lakhs. Proceeds on death / maturity are tax-free under Section 10(D).

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To learn more about the income tax slab FY 2020-21, click here.

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