With just a few weeks left for the end of the financial year, salaried as well as business professionals may be comparing different investments options to reduce their taxes. When you choose among the different options, you need to understand how the returns are taxed. If the earnings are taxable, your actual return on investment decreases.
Here are five financial instruments that help you save moneyby providing tax-free returns.
- Public Provident Fund (PPF)
PPF has been a very popular tax-saving investment for several years. This is because, in addition to the section 80C deduction, the interest and maturity proceeds on PPF are tax-free. It is a 15-year scheme, which may be extended by five years for an indefinite period. Currently, the interest rate on PPF is 7.8%. You must contribute at least INR 500 per year to keep your PPF account active.
- Employee Provident Fund (EPF)
EPF not only helps you save tax but also enables you to build a tax-free corpus over the long-term. You must contribute 12% of your basic salary to the EPF, which is matched by your employer. However, the section 80C benefits are available only on your contribution. The current rate of interest on EPF is 8.65% per annum.
- Equity-Linked Savings Scheme (ELSS)
ELSS is a type of diverse equity mutual fund, which invests a majority of the corpus in equity and related instruments. Your investment of up to INR 1.5 lakh per year is eligible for tax benefits according to section 80C falling under the Income Tax Act, 1961. Additionally, the dividends and maturity income are tax-exempt. ELSS mutual funds come with a lock-in period of three years, which means you cannot exit the investment during this period. The returns are not fixed because these depend on the market performance.
- Unit-Linked Insurance Plans (ULIPs)
ULIPs are hybrid insurance plans, which offer protection as well as investment. A portion of the premium is invested in market-related investment instruments to earn higher returns. Although ULIPs may be for a period of 15 to 20 years or longer, the minimum lock-in period is five years. The maturity proceeds earned after remaining invested for at least five years are tax-free.
- Insurance plans
Traditional insurance plans include money back, endowment, or whole life products. These insurance plans include a savings component and have a fixed sum assured and duration. The premium will depend on your age at the time of purchasing the policy, sum assured, and the period. You must pay the premium every year until the maturity
date. However, some limited premium payment plans are available that cover you even after the premium payment term is over. The premium is eligible for tax benefitsas per section 80C. Additionally, the death benefits or maturity proceeds are tax-free.
Each of the aforementioned instruments has their pros and cons. You must compare different options and make an informed decision based on your personal requirements and preferences.