Tax-Free Income and Investment Options in India

Investment and savings are essential aspects of financial planning. Another important aspect of a financial plan is the taxes^* that you have to pay on your income. But, various tax-free return investments in India can help you lower your taxes.
 

The government has listed various sections under which one can get tax exemptions and deductions on investments. There are many tax-free return investments in India that you can choose so that you can save more. As an investor, it is one of the most important things to know. 
 

To help you understand more about tax-free investments in India.

List of Tax-Free Income Investments in India

Here is the list of tax-free income investments in India:
 

Life insurance 

Life insurance policies offer not only financial security for your loved ones but also potential tax benefits. Reasons why life insurance is a valuable choice for tax-free returns investments in India:
 

• Tax Benefits: You can get a tax deduction of up to ₹1.5 lakhs on the premium you pay for the life insurance policy under Section 80C. Moreover, under Section 10(10D), the amount you will receive if the policyholder dies is exempt from taxes. 

• Financial Protection: Life insurance provides a lump-sum payout to your beneficiaries in case of your demise, ensuring their financial stability.

• Savings and Investment: Some life insurance policies, such as savings insurance or unit-linked plans, also serve as savings vehicles, helping you accumulate wealth over time.

• Variety of Plans: You can choose from various types of life insurance policies, such as term plans, guaranteed1 returns plans, ULIPs, etc., based on your financial goals and protection needs.
   

PPF (Public Provident Fund)

The Public Provident Fund is a government-backed savings scheme with tax benefits, making it an attractive choice for investors. You can start a PPF by investing an amount as low as ₹500. 
 

PPF is a popular tax-free income investment option in India for the following reasons:
 

• Tax Benefits: Investments in PPF qualify for deductions under Section 80C, and the interest earned and maturity proceeds are tax-free. Remember that under Section 80C, the income tax-free investments limit in India is capped at ₹1.5 lakhs. 

• Steady Returns: PPF offers a fixed interest rate, providing predictable returns over the long term. It is a great investment option for risk-averse investors as the returns on this are less risky and guaranteed1.

• Lock-in Period: While the initial lock-in period is 15 years, you can extend it in blocks of 5 years, allowing for long-term savings.

• Safety and Security: PPF is backed by the government, making it a safe and secure investment option.

• Partial Withdrawals and Loans: You can make partial withdrawals and avail of loans against your PPF account, providing liquidity in emergencies.
   

NPS (National Pension Scheme)

To help people save for their retirement, the government has introduced the NPS, which is regulated by PFRDA (Pension Funds Regulatory and Development Authority). If you are an Indian citizen between 18 and 60 years old, you can invest in this. 
 

Choose NPS for tax-free income for the following reasons:
 

• Tax Benefits: Contributions to NPS are eligible for deductions under Section 80CCD(1) and 80CCD(1B), providing significant tax savings.

• Long-Term Retirement Planning: NPS encourages disciplined, long-term retirement savings, helping you build a substantial corpus for your post-retirement years.

• Flexibility: You can choose between equity, debt, and hybrid fund options, tailoring your investment strategy to your risk tolerance and retirement goals.

• Additional Tax Benefit for Employers: Employees can claim an additional deduction under Section 80CCD(2) if their employer contributes to their NPS account.

• Tax-Free Withdrawals: At maturity, a portion of the NPS corpus can be withdrawn tax-free, and the rest can be used to purchase an annuity for regular income.

• Portability: NPS is portable, allowing you to continue contributions even if you change jobs.
   

Fixed Deposits 

If you are looking for tax-free fixed-income investments, the 5-year tax-saving fixed deposits are the right one for you - a traditional investment option that offers stable returns and tax benefits. 
 

Let us see why FDs are the top tax-free income investments for people who wish to invest without taking too much risk but still save on taxes:
 

• Tax Benefits: Investments in tax-saving FDs with a lock-in period of 5 years are eligible for deductions under Section 80C.

• Stable Returns: FDs provide predictable interest rates, making them a safe choice for risk-averse investors.

• Wide Range of Options: Banks and financial institutions offer various FD tenures, allowing you to choose one that suits your investment horizon.

• Liquidity: FDs offer liquidity through premature withdrawal options, although penalties may apply.

• Senior Citizen FDs: Senior citizens can avail of higher interest rates on FDs, further enhancing their income.
   

Pension Plans

Pension plans, also known as retirement plans, are designed to secure your financial future during your retirement years while offering tax benefits. 
 

Apart from retirement financial planning, pension plans offer the following benefits:
 

• Tax Benefits: Premiums paid towards pension plans are eligible for deductions under Section 80CCC, and the annuity income received post-retirement is taxable as per your tax slab, providing tax efficiency.

• Regular Income: Pension plans ensure a steady source of income during retirement, helping you maintain your lifestyle.

• Customisation: You can choose between immediate and deferred annuity plans, as well as various annuity options, to tailor your retirement income as per your needs.

• Long-Term Financial Security: Pension plans are ideal for long-term financial planning, ensuring you have a corpus for your post-retirement expenses.

• Flexibility: Some pension plans offer the flexibility to receive a lump sum at maturity, providing liquidity.
   

SCSS (Senior Citizens Saving Scheme)

 

 

SCSS is a government-backed savings scheme designed specifically for senior citizens, offering attractive tax benefits. 
 

Invest in SCSS for the following benefits:
 

• Tax Benefits: Investments in SCSS qualify for deductions under Section 80C, making it a tax-efficient choice for senior citizens. The interest earned on the invested amount is tax-free up to a certain limit, but there will be a TDS deduction if it exceeds that limit. 

• Investment Amount: The minimum amount you can invest is ₹1000, while the maximum amount has been raised from ₹15 lakhs to ₹30 lakhs. 

• Attractive Interest Rates: With higher interest rates compared to other fixed-income instruments, SCSS ensures a steady income stream. You will get interest on the deposited amount on a quarterly basis. 

• Safety and Security: SCSS is backed by the government, providing senior citizens with a safe and secure investment avenue.

• Lock-in Period and Maturity: SCSS has a lock-in period of 5 years, extendable for an additional 3 years, ensuring long-term financial stability for seniors.

• Regular Income: SCSS offers regular interest payouts, providing senior citizens with a reliable income source during retirement.
   

ULIPs^# (Unit-Linked Investment Plans)

ULIPs are a unique investment-cum-insurance product in India that offers tax benefits while helping you grow your wealth. They combine the benefits of insurance coverage with market-linked investments. 
 

ULIPs are a great choice for tax-free investments in India as they offer:
 

• Tax Benefits: Under Section 80C of the Income Tax Act, you can claim deductions on the premium paid towards your ULIP up to a specified limit. Moreover, the maturity proceeds are tax-free under Section 10(10D), making ULIPs an attractive long-term tax-saving option.

• Flexibility: ULIPs offer the flexibility to choose between equity, debt, or hybrid funds, allowing you to align your investment strategy with your risk appetite.

• Wealth Creation: The market-linked component of ULIPs helps you create wealth over the long term, as returns are linked to market performance.

• Liquidity: Some ULIPs offer partial withdrawal options after a specified lock-in period, providing liquidity in times of need.

• Life Cover: ULIPs provide a life insurance cover, ensuring financial security for your family in case of an unfortunate event.
   

ELSS (Equity-Linked Savings Scheme)

ELSS funds are a popular choice for investors looking to save on taxes while earning potentially higher returns through equity investments. 
 

Following are the reasons why ELSS is a favoured option for tax-free return investments in India:
 

• Tax Benefits: Investments in ELSS are eligible for a deduction of up to ₹1.5 lakhs under Section 80C of the Income Tax Act, making it a potent tool for tax planning.

• Equity Exposure: ELSS funds primarily invest in equities, providing the potential for higher returns compared to traditional tax-saving instruments like PPF or FDs, especially over the long term.

• Lock-in Period: ELSS funds have a mandatory lock-in period of three years, which ensures discipline in long-term wealth creation.

• Lump Sum or SIP: Investors can choose between lump-sum investments or Systematic Investment Plans (SIPs) to suit their investment style and financial goals.

• Professional Management: ELSS funds are managed by experienced fund managers who aim to maximise returns while maintaining a diversified portfolio.

• Flexibility: After the lock-in period, investors can redeem units partially or completely, providing liquidity when needed.

Conclusion

Tax saving should be one of your top priorities regarding your investment goals. Along with that, you should also focus on earning tax-free income. It is very important to list your financial objectives and choose the right investment. When investing in your chosen plan, you should consider your risk profile, type of funds, lock-in period, etc.
 

If you are looking to purchase a life insurance policy, Tata AIA offers various life insurance plans that can fulfil your requirements. Depending on your needs, you can choose from different life insurance plans, including term, savings, and retirement plans. 
 

If you wish to get more information, you can visit our website or contact us.