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Income tax saving schemes: Top financial instruments that will help you save tax

Generally, the period of January-March is considered to be the quarter of tax saving as a lot of income tax-paying individuals make their investments during these three months of the financial year.

To save tax under the Income Tax Act, 1961, salaried individuals whose income is taxable have to submit their actual investment proofs to their employers in the last quarter of the financial year (April-March).

The period of January-March is considered to be the quarter of tax saving as a lot of income tax-paying individuals make their investments for the purpose of saving taxes.

Most of the options of saving tax that are available to individuals are under Section 80C of the Income Tax Act. Section 80C includes multiple investments through which you can claim deductions on, however, it is up to a limit of Rs 1.5 lakh in a financial year.

Here are the top financial instruments which can be used for the purpose of saving income tax.

ELSS Funds

The equity-linked saving scheme (ELSS) funds are tax saving mutual funds where an individual can save up to Rs 46,800 in a financial year under Section 80C of the Income Tax Act.

The ELSS funds come with the lowest lock-in period among all tax-saving financial instruments, that is, just three years and they invest a minimum of 80 per cent of their assets in the equity markets.

Generally, these ELSS funds also provide the maximum return on investment to the investor, however it is subject to the growth of the equity markets. Returns on these funds are presently subject to Long Term Capital Gains (LTCG) tax at 10 per cent if the gains are above Rs 1 lakh.

However, it must be noted that ELSS is an investment in the equity market, therefore, it is more suitable for those individuals who are open to the risk appetite and stay invested for longer period of time so as to reap its benefits.

National Savings Certificate (NSC)

A National Savings Certificate (NSC) comes with a tenure of five years and has a fixed rate of interest. It can be opened at any nearby post office and in the present situation carries a slightly higher interest rate than a bank fixed deposit (FD).

The interest on NSC is also automatically counted towards the limit of Rs 1.5 lakh under Section 80C and is tax-deductible if no other investments are using up the limit.

Presently the interest rate available on NSC is 7.9 per cent which is compounded annually but payable at maturity, according to the information available on India Post's website.

5-Year Bank Fixed Deposit

The tax saver fixed deposit (FD) is a type of fixed deposit which has a tenure of five years and carries a fixed rate of interest. By investing in a five-year FD, an individual can claim tax benefits under Section 80C up to Rs 1.5 lakh.

These FDs can be opened from any public sector or private sector bank in the country, however, the interest rates offered varies from bank to bank.

Also, it must be noted that though this financial instrument is going to provide a tax benefit to the individual, tax deducted at source (TDS) from the interest on these FDs is applicable during the time of maturity.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term tax saving investment instrument that offers an annually fixed rate of interest on the amount invested. A PPF comes with a lock-in period of 15 years.

In a PPF, the interest earned and the returns are tax-free. The amount that is deposited during a financial year can be claimed under Section 80C. Presently the interest rate on PPF is 7.9 per cent, according to the latest circular released by the Department of Economic Affairs (DEA) on December 31, 2019.

PPF can be opened across any of the public sector banks or certain private sector banks or post office.

National Pension System (NPS)

The National Pension Scheme (NPS) is a type of social security scheme by the government. This pension scheme is available for all the employees from the public, private and even the unorganised sector.

NPS allows people to invest in a pension account throughout their employment till the age of retirement. After they retire, the investors can withdraw a certain percentage of the total corpus. The NPS subscriber will receive the remaining amount of the corpus as a monthly pension after the retirement.

This particular scheme can be ported across jobs and locations and there are tax benefits under Section 80C and Section 80CCD.

Life Insurance Premiums

The premiums paid for different types of insurance policies such as unit-linked insurance plans (ULIPs), endowment policies and term insurance provide tax benefits up to Rs 1.5 lakh.