“A penny saved is a penny earned.” Incorporating tax savings into your portfolio can give you a head-start for your future. It helps you to protect your funds for the longer run by inculcating a financially healthy habit of saving a portion of your income. Most of the tax saving instruments offer more than just tax benefits. 

The old tax regime prevailed before the implementation of the new tax regime. HRA and LTA in the old regime can reduce your tax payments. There are over 70 exemptions and deductions available under this regime. 

Budget 2020 brought forth a new tax system that changed the tax slabs and provided taxpayers with reduced tax rates. However, several exemptions and deductions, including HRA, LTA, 80C, 80D, and others, are not available to individuals who choose the new system. 

The major difference between the old and new regimes is the tax brackets and tax rates. The new regime has more tax brackets along with tax rates as compared to the old regime. This has had an impact on tax-saving investing strategies.

What are Tax-Saving Investments?

Financial instruments or techniques known as "tax-saving investments" are created to assist individuals and organizations in lowering their tax obligations by utilizing provisions stipulated in tax legislation. 

Tax saving is using various ways that can help you save money on your taxes and increase your income, conforming to the legal obligations and requirements under the Income Tax Act, of 1961.

Certain tax benefits associated with these investments, such as credits, exemptions, or deductions, can reduce taxable income and, in turn, the total tax burden. 

Tax-saving should be a part of your financial planning because it can help you avail deductions for a variety of essential long-term purchases.

Have you calculated your taxable income? If not, here's a beginner's guide for salaried employees to calculate taxable income.

Tax-Saving Investment Options for FY 2024-25

Here are some tax-saving options:

Tax Saving Options Under Section 80C

#1. ELSS Fund (Equity Linked Saving Scheme)

ELSS are mutual funds that invest a major portion of their assets in equities (stocks). They offer potentially high returns but come with market risks. 

They combine Section 80C tax savings with the advantages of equity investing. Long-term investors choose ELSS because of its 3-year lock-in period, which allows for tax savings and the possibility of large gains. 

Know how mutual fund SIPs help in tax saving in detail.

#2. National Pension Scheme

NPS is a retirement savings scheme backed by the government. It offers market-linked or fixed-income investment options.

Under the direction of the Central Government and the Pension Fund Regulatory and Development Authority (PFRDA), the National Pension Scheme (NPS) India is a voluntary, long-term investment plan for retirement. 

For everyone who works in the private sector and needs a steady pension upon retirement, the NPS system is quite valuable. With tax incentives under Sections 80C and 80CCD, the program is transferable across occupations and places.

#3. Unit-Linked Insurance Plans (ULIPs)

ULIPs are insurance plans with an investment component. A portion of your premium goes towards insurance coverage, and the rest is invested in the market.

An insurance plan connected to units can be used for a number of things, such as life insurance, asset accumulation, retirement income, and funding children's and grandchildren's education.

A ULIP is frequently formed by an investor in order to benefit their descendants. The beneficiaries of a life insurance ULIP would get payments if the owner passed away.

#4. Public Provident Fund (PPF)

PPF is a long-term savings scheme backed by the government. It offers guaranteed returns with interest rates revised quarterly.

For people who don't want to take on too much risk, a public provident fund plan is the best option. This strategy is supported by guaranteed returns since it is required by the government to safeguard the financial needs of the majority of Indians. Moreover, invested money in the PPF account is also not tied to the market.

A further option for investors looking to diversify their financial and investing portfolios is the public provident fund regime. PPF accounts can offer consistent yearly returns on investment throughout economic downturns.

#5. Sukanya Samridhhi Yojana (SSY)

SSY is a government scheme specifically for girl child's future. It offers attractive interest rates and tax benefits.

Applications for SSY can be submitted through Post Offices, Public Sector Bank branches, and three private sector banks: ICICI Bank, HDFC Bank, and Axis Bank. A girl child's parent or legal guardian may open the account. 

The girl has to be younger than ten years old. A girl kid is only permitted to have one account. A household is limited to two SSY account openings. The annual Maximum Investment is ₹1,50,000; the Annual Minimum Investment is ₹250.  

#6. National Saving Certificates (NSCs)

NSCs are fixed-income instruments issued by the government. They offer a fixed interest rate for the chosen term.

Investing in NSC is a secure option for anybody seeking to reduce their tax liability and get a consistent rate of return on their investment. 

NSC provides total capital protection together with interest guarantees. But like other fixed income plans, they can't overcome inflation with returns comparable to the National Pension System and tax-advantaged mutual funds.

#7. Senior Citizen Saving Schemes (SCSS)

SCSS is a government savings scheme specifically for senior citizens. It offers attractive interest rates.

Indian seniors who live in retirement can contribute a lump amount to the program either individually or jointly, and they will get tax benefits in addition to monthly income. A Post Office savings plan is involved. 

To receive the benefits of the SCSS, senior persons must first create a SCSS account. They are able to open an account at any authorized bank or Post Office branch. 

#8. Bank FDs

Tax saving FDs are fixed deposits offered by banks with a lock-in period of typically 3-5 years. They offer guaranteed returns but may have lower rates compared to other options.

The interest rate and resulting interest generated increase with the length of the investment term. 

At the end of the FD's tenure, the interest generated is either reinvested in the FD or credited to the investor's savings account (the majority of banks demand that deposit holders maintain a savings account with them).

Are you a freelancer? Here're tax saving tips for freelancers to maximise your savings and reduce tax liability.

Tax-saving options other than Section 80C

#1. Section 80D

Section 80D of the Income Tax Act, 1961 in India allows tax deductions for health insurance premiums and medical expenses. It is a way to encourage people to get health insurance and be conscious about their healthcare. 

Any individual and Hindu Undivided Families (HUFs) can claim this deduction.

  • Deduction Limit
    • Up to Rs. 25,000 per year for individuals below 60 years old (includes Rs. 5,000 for preventive check-ups)
    • Up to Rs. 50,000 per year for senior citizen (Age >= 60 years)

#2. Section 80DD

Section 80DD allows for a tax deduction for individuals and families taking care of disabled dependents. It provides financial relief to those in curing medical expenses or costs associated with caring for a disabled family member.

The maximum deduction amount depends on the severity of the disability.

  • For a disability of 40% or more: Rs. 50,000
  • For a severe disability of 80% or more: Rs. 1,25,000

#3. Section 80DDB

This Section allows individual taxpayers and HUFs to claim deductions for medical expenses incurred on the treatment of specified diseases. It provides tax relief and manages the financial burden of these illnesses. 

The deductions are allowed for medical treatment of diseases listed under Rule 11DD of the Income Tax Act. The list covers various serious illnesses such as cancers, AIDS, renal failure, and neurological ailments. 

The deduction limit varies depending on age and actual expenditures spent.

#4. Section 80E

Section 80E provides a tax benefit for people who have taken out an education loan for higher studies. It allows you to deduct the interest paid on the loan from your taxable income.

The deduction applies only to the interest portion of the education loan repayment, not the principal amount. The deduction applies to loans taken for higher education by the taxpayer, their spouse, children, or a student for whom the taxpayer is a legal guardian. 

There’s no upper limit on the total interest amount you can claim for deduction under section 80E. Additionally, you can claim the deduction for a maximum of eight years, starting from the year in which you begin repaying the interest.

#5. Section 80EE

Section 80EE offers a tax deduction for interest paid on home loans to first-time home buyers. It allows a deduction of up to Rs. 50,000 per financial year on home loans. The deduction limit is ₹50,000, plus complementary advantages under Section 24(b).

This deduction is in addition to the Rs. 2 lakh deduction allowed under Section 24(b) for mortgage interest. To be eligible, the loan must be approved between April 1, 2016 and March 31, 2017, and the property value cannot exceed Rs. 50 lakh. 

If the deduction is not claimed in full, it can be carried forward for up to eight years. The property must be self-occupied, and the taxpayer may not own any other residential properties.

#6. Section 80G

Section 80G allows taxpayers to claim deductions for donations made to certain charitable institutions and funds. It is basically a tax benefit offered by the government to encourage people to donate towards social causes. This regulation applies to both persons and organizations.

The deduction amount for digital donations, such as bank transfers, is not limited under Section 80G. This implies that taxpayers can claim that their whole payment to a charity organization is tax-free.

However, there is a monetary donation limit. Cash donations up to ₹2,000 per year are excluded from tax computations. It is crucial to clarify that this exemption applies solely to donations made to registered charity organizations. 

#7. Section 80GG

Section 80GG allows for a tax deduction for rent paid on your residential accommodation. It is a benefit to taxpayers who don’t receive House Rent Allowance (HRA) from their employers.

Any salaries and self-employed individuals paying rent can claim this deduction. 

The amount of the deduction you can claim is the lowest of the following:

  • Rs. 5,000 per month
  • 25% of your total income
  • Rent paid minus 10% of your total income

#8. Section 80GGA

Section 80GGA of the Income Tax Act allows individual taxpayers to claim a deduction for donations they make towards specific scientific research or rural development initiatives. You can claim a 100% deduction on the amount donated. 

Please make a note that donations made to certain qualifying institutions or programs are eligible. These includes:

  • ​Registered universities, colleges or institutions conducting scientific research.
  • Registered organizations involved in rural development.
  • Organizations registered with the National Committee for carrying out government-approved rural development projects.
  • The Central Government's rural development fund.

This deduction is available to all individual taxpayers except those with income solely from business or profession. You can’t claim this deduction if you have opted for the new tax regime.

Donations can be made via cheque, draft or online transfer. Cash donations exceeding Rs. 2,000 aren’t eligible for deductions. 

#9. Section 80GGB

Section 80GGB allows Indian companies tax deductions for donations they make to registered political parties or electoral trusts. You can claim a deduction of 100% of the donation amount. 

There’s no limit specified by the Income Tax Act, but Companies Act, 2013 restricts companies’ contribution to 7.5% of their average net profit over the past three years. 

Here’re a few point to keep in mind:

  • Donations cannot be made in cash.
  • Companies must maintain proper records of the donations.
  • There’s no such restriction on donating to multiple parties.
  • Donations cannot be from foreign sources.

#10. Section 80GGC

Section 80GGC allows individual taxpayers to claim a tax deduction for donations made to registered political parties or electoral trusts. The aim of this is to encourage transparency in political funding by incentivizing contributions through tax benefits. 

The donation can be made through any mode other than cash to a registered political party (as per Section 29A of the Representation of the People Act, 1951) or an electoral trust qualify for deduction.

Section 80GGC allows you to deduct the whole amount you donate to a registered political party or electoral trust but it cannot exceed your total taxable income.

In order to claim this deduction, you need a receipt or certificate issued by a political party or electoral trust acknowledging your donation. The receipt must mention your name, the amount donated, and the registration number of the entity.

#11. Section 80TTA

Section 80TTA allows for a deduction of up to Rs. 10,000 on income earned from interest on savings accounts held in banks, c-operative societies, or post offices in India. This is to encourage people to save money.

This deduction applies to interest income, not the principal amount deposited. Additionally, the deduction cannot be claimed for interest earned on fixed deposits and recurring deposits. 

#12. Section 80U

Section 80U  provides tax relief to resident individual taxpayers in India who have a disability. The conditions are that you must have a disability certificate by a government authorized medical authority and the disability level should be at least 40%.

The type of disability covered u/s 80U includes blindness, low vision, hearing impairment, locomotor disability, mental retardation, and mental illness.

  • For a disability of 40% or more but less than 80% - A deduction of Rs. 75,000 is available.
  • For  a severe disability of 80% or more - A deduction of Rs. 1,25,000 can be claimed.

#13. Section 24B

Section 24B of the Income Tax Act permits persons to deduct the interest paid on a house loan from their taxable income. This deduction applies to loans obtained for the purchase, construction, repair, or rebuilding of a residence.

The deduction is calculated on an accrual basis, which means it can be claimed even if the interest was not fully paid within the fiscal year. For self-occupied homes, the maximum deduction limit is ₹2 lakh (₹1.5 lakh in 2020-21).

If the property is neither self-occupied or rented out, the deduction has no limit and can be claimed for the total amount of interest paid.

#14. Section 80TTB

Section 80TTB of the Income Tax Act in India is a provision that offers tax relief to senior citizens on the interest income they earn from deposits. It is to reduce the tax burden on senior citizens who rely on interest income from their savings during retirement. 

A maximum deduction of Rs 50,000 can be claimed on interest income earned from deposits during the financial year. 

The deduction covers interest earned on various deposits including savings accounts, fixed deposits, recurring deposits, and any other term deposits held with banks, co-operative societies involved in banking, and post offices.

To Wrap it Up!

In conclusion, tax-saving investments play an important role while financial planning. It provides both reduced tax liabilities and help to build wealth for the future. It is important to understand the difference between old and new tax regimes. 

The plethora of deductions can be beneficial to those who use a significant amount of the deduction limits. Moreover, various investment options can provide tax benefits and may align with their financial goal. 

Remember, it’s crucial in consulting a financial advisor for personalized tax-saving strategies.

Take control of your finances today for a better future.

Frequently Asked Questions (FAQs)

Q1. Which investment is best for tax saving?

There is no “best” investment for tax saving in India. The factors depend on risk tolerance, investment horizons and tax regimes. Moreover, you can consult a tax professional to find the investment option that is best for you.

Q2. Which investment is 100% tax-free?

In India, there aren't investments that are completely tax-free on the invested amount. However, several options offer tax benefits under sections like 80C. These investments come with a lock-in period and offer tax exemption on investment amount (Section 80C), interest earned, and maturity amount (EEE category). Public Provident Fund (PPF) is a popular example. 

Q3. Do I have to pay taxes on the investment?

It depends on various factors like type of investment, your tax regime, how long you hold the investment, etc. 

Q4. What is the maximum tax limit under section 80C?

The maximum tax deduction limit under Section 80C in India for the financial year 2023-24 and assessment year 2024-25 is Rs. 1,50,000.