7 top investment schemes that save you taxes while yielding you decent returns

Reducing the tax load is a common priority for all taxpayers, as it’s natural to seek ways to retain more of your well-earned income. Thankfully, there are several legal and ethical avenues to achieve this goal.

Finding the right equilibrium between favourable returns and tax advantages is a primary consideration for numerous investors. Although exclusively depending on investments for tax savings may not be the most prudent approach, they can indeed serve as a valuable asset in your tax optimization toolkit.

Popular among Indian investors aiming for guaranteed returns and assured income through interest, government-backed schemes such as the Public Provident Fund (PPF), tax-saving fixed deposits, Sukanya Samriddhi Yojana (SSY), Senior Citizen Savings Scheme (SCSS), and National Savings Certificate (NSC) each address distinct needs and provide specific benefits:

In addition to government-sponsored schemes, alternative programs such as the National Pension Scheme (NPS) and equity-linked savings schemes (ELSS) exist. Although these schemes do not assure guaranteed returns, they play a dual role by facilitating wealth accumulation and providing tax-saving benefits.

Public Provident Fund

The PPF stands as a widely favoured investment scheme available through both post offices and numerous banks in India. Its popularity is attributed to a distinctive blend of benefits it provides:

• While it may not yield the potentially high returns of equity-based investments, PPF ensures stability with government-backed interest rates, presently fixed at 7.1% per annum (as of April 2023). This renders it a dependable choice for individuals aiming for consistent and predictable growth over the long term.
• Contributions made to the PPF are eligible for deductions under Section 80C of the Income Tax Act, enabling you to reduce your taxable income by up to ₹1.5 lakh annually. Furthermore, the interest earned and the total maturity amount at the end of the term are exempt from taxes, establishing it as a notably tax-efficient investment.
• Possessing a 15-year lock-in period, PPF promotes the cultivation of long-term investment habits. While limited partial withdrawals are permissible under certain conditions starting from the 7th year, the primary objective of the PPF is to construct a significant corpus for retirement or other enduring financial goals.
• Supported by the Indian government, PPF accounts provide unmatched safety and security for your investments. The risk of default is virtually non-existent, rendering it a suitable choice for even the most risk-averse investors.
• Despite the stipulated lock-in period, PPF provides a measure of flexibility. You have the option to deposit any amount between ₹500 and ₹1,50,000 per year into your account, according to your convenience. Additionally, if you wish to continue accumulating wealth, you can extend the tenure beyond the initial 15 years in blocks of five years.

Overall, PPF offers a compelling combination of guaranteed returns, tax benefits, long-term stability, safety, and flexibility. This makes it a valuable tool for individuals seeking to build a secure financial future, particularly for retirement.

Senior Citizen Savings Scheme

The SCSS stands as a distinctive initiative by the Indian government, aiming to offer secure and appealing investment alternatives for senior citizens. This program is available to Indian residents aged 60 years or above (55 years if retired under VRS or Special VRS) and can be initiated either individually or jointly with a spouse. The key benefits of investing in this scheme include:

• The government reviews and sets the SCSS interest rate every quarter. In the present quarter (January-March 2024), the SCSS interest rate has been consistent at 8.2% per annum. This rate remains robust in comparison to various other investment alternatives for senior citizens, providing them with a dependable source of income.
• Investments in SCSS can range from ₹1000 to ₹30 lakh. This accommodates individuals with modest savings as well as those with substantial retirement funds, allowing them to take advantage of the attractive interest rate and safety offered by SCSS. Furthermore, deposits must be made in multiples of Rs. 1,000, offering additional flexibility to customize investments according to your specific goals.
• The interest accrued on SCSS is fully taxable. Nevertheless, there is a higher threshold for tax-free interest income for senior citizens, presently set at ₹50,000 per annum.
• New provisions have been introduced by the government, enabling the spouses of deceased government employees to invest financial aid benefits in the SCSS scheme. This modification is regarded as a positive measure towards ensuring financial security for surviving spouses, especially those who may have been financially dependent on their deceased partners.

In general, the 8.2% interest rate on SCSS continues to be an appealing choice for senior citizens seeking a safe and secure investment with a favourable return.

Sukanya Samriddhi Yojana

The SSY is a government-backed savings scheme uniquely crafted to secure the future of girl children. Below are some key features of the SSY that make it an attractive choice for ensuring your daughter’s future, coupled with the added benefit of tax advantages.

• Presently providing an annual interest rate of 8.1% (as of January 2024), which is among the highest for small savings schemes, investing in SSY facilitates the gradual accumulation of a substantial corpus.
• With a tenure spanning 21 years from the account opening date, the SSY promotes long-term savings and wealth creation for your daughter’s future requirements.
• Contributions to your daughter’s SSY account can range from a minimum of ₹250 per month to a maximum of ₹1.5 lakh per year. This flexibility allows you to tailor your deposits according to your income and budget.
• Contributions to SSY are eligible for deductions under Section 80C of the Income Tax Act, with a yearly limit of ₹1.5 lakh. Furthermore, the interest earned and the maturity amount are exempt from taxes, establishing it as a highly tax-efficient investment option.
• With the backing of the Government of India, SSY ensures complete security for your investments, offering reassurance that your daughter’s future is financially protected.

In summary, the scheme provides a valuable opportunity for fathers (and guardians) to invest in their daughter’s future education, marriage, or any other significant life goals, with the added benefit of eligible tax deductions for the contributions.

National Savings Certificate

The NSC stands as a widely favoured and trustworthy choice for securing guaranteed returns, supported by the Government of India. Here are some of its features:

• The scheme currently offers a 7.7% interest rate per annum, providing a predictable and secure way to grow your investments.
• Available in two tenures – 5 years and 10 years – the NSC allows you to choose the option that best aligns with your financial goals and risk appetite.
• With a minimum investment requirement of just Rs. 1000, the NSC makes it accessible for individuals with diverse savings capacities.
• Enjoy partial tax exemption on interest earned and a tax-free maturity amount under specific conditions, making it a tax-efficient investment avenue.
• Despite having a lock-in period, the NSC allows partial withdrawals after the completion of the third year, albeit with some interest penalty.
• The scheme is accessible to all Indian citizens, including minors who can invest through a parent or guardian. Investments can be made at post offices and selected banks nationwide. Additionally, a nomination facility is available to ensure a seamless transfer of the certificate in case of unforeseen circumstances.

In general, NSC offers a comprehensive package for individuals in search of stable income growth, capital protection, and tax benefits. For those with a moderate risk tolerance and long-term financial goals, incorporating NSC into their investment portfolio can be a valuable choice.

National Pension Scheme

The NPS emerges as an excellent choice for individuals aiming to amass a significant retirement fund and ensure a consistent monthly income during their golden years. Here’s what sets NPS apart:

• NPS allocates funds across various asset classes, including equity, government bonds, and corporate debt, offering the potential for high returns over the long term. While not guaranteed, these returns can significantly surpass those of traditional instruments like PPF or FD.
• The scheme offers impressive tax incentives. Contributions of up to ₹1.5 lakh qualify for deduction under Section 80C, with an additional deduction of ₹50,000 available under Section 80CCD(1B). Moreover, the entire corpus at maturity is tax-free, and only 40% of it is taxable at the time of withdrawal.
• The scheme facilitates the accumulation of a substantial corpus through regular contributions throughout your working life. Upon reaching retirement, you can withdraw 40% of the corpus tax-free and utilize the remaining 60% to purchase an annuity that provides a regular monthly pension for life.
• You have the flexibility to tailor your investment mix (opting for either active or auto choice) and select your fund manager, adjusting them as your risk tolerance changes. Moreover, NPS accounts are transferable across employers and locations, guaranteeing continuous contributions even if you change jobs.
• NPS comes with an extended lock-in period until retirement at the age of 60. Although partial withdrawals are permitted for specific reasons, early withdrawals incur substantial penalties.
• Given that NPS is market-linked, returns can experience significant fluctuations in the short term. This demands an investor with a high-risk tolerance and a long-term perspective.

In summary, NPS stands as a potent instrument for establishing a financially stable retirement. With its array of tax benefits, substantial return potential, and a secured income option, NPS emerges as a compelling choice for long-term investors aiming at significant wealth accumulation.

Tax-saving fixed deposits

Although fixed deposits (FDs) can serve as a dependable investment option, it’s crucial to note that not all FDs provide tax benefits. Only tax-saving FDs, which come with a lock-in period of five years, are eligible for tax deductions under Section 80C of the Income Tax Act. Regarding these tax-saving FDs:

• A compulsory lock-in period of five years.
• Permits you to claim a deduction of up to Rs. 1.5 lakh annually on the invested amount under Section 80C.
• While the interest earned is taxable, the interest rate for tax-saving FDs is generally higher than that of regular FDs to offset the decreased liquidity.
• The tax advantage can be substantial, particularly for individuals in higher tax brackets.
• Early withdrawals from tax-saving FDs result in penalties and render you ineligible for the associated tax benefits.
• You are allowed only one tax-saving FD account per financial year.

In conclusion, for individuals with a long-term investment horizon seeking a tax-efficient investment, a tax-saving FD can be a viable choice. However, investors must comprehend the lock-in period and tax implications before making any investment decisions.

Equity-linked Savings Scheme

ELSS funds predominantly allocate at least 80% of their corpus to equity-oriented instruments, rendering them comparatively more aggressive than other mutual fund categories. Given their emphasis on equity, ELSS funds have the potential to yield returns that surpass inflation over the long term. This aspect can be particularly advantageous for investors seeking to accumulate wealth and enhance their savings over time.

ELSS represents a specific category of mutual funds with various advantages, including:

• Investments in ELSS, up to ₹1.5 lakh per year, qualify for deductions under Section 80C of the Income Tax Act, thereby significantly reducing your taxable income.
• Given that ELSS primarily invests in equities, it has the potential to generate high returns over the long term, aiding in the creation of a substantial corpus for your financial goals.
• Compared to other tax-saving options like PPF or NPS, ELSS features a relatively shorter lock-in period of just three years. This implies that you can access your invested money after three years if the need arises.
• Having a significant allocation to equities also exposes ELSS funds to market fluctuations and volatility. Short-term performance can be unpredictable, rendering them less suitable for individuals with low risk tolerance or short-term investment horizons.

ELSS is most suitable for long-term investors, preferably with a horizon of at least five to seven years. This timeframe allows ample opportunity for the market to navigate cyclical downturns and potentially yield significant returns. While ELSS offers the potential for high returns, it is imperative to assess your risk tolerance thoroughly before investing. Take into account your financial goals, time horizon, and capacity to manage potential losses before making any investment decisions.

In essence, ELSS provides a compelling option for investors aiming at long-term wealth creation through equity exposure. Nevertheless, careful consideration of investment risks and responsible financial planning is essential to ensure that this investment type aligns with your individual needs and goals.