Best Investment Options in India to Save Tax: 8 Smart Ideas

Tax-saving investments are an essential part of financial planning for every taxpayer in India. Not only do they help in reducing your tax burden, but they also offer an opportunity to build wealth over time.

The Indian government provides various tax-saving schemes under Section 80C and other sections of the Income Tax Act, which can help individuals reduce their taxable income.

In this article, we will explore the best investment options in India to save tax, offering both short-term and long-term solutions that suit various financial goals.

Why Invest in Tax-Saving Schemes?

Before diving into the best tax-saving investments, let’s understand why it’s important to invest in such schemes. Tax-saving investments allow you to:

• Reduce taxable income: Lower your overall income and pay fewer taxes.
• Earn returns: Grow your wealth while saving tax.
• Enjoy tax-free growth: Some investment options allow the returns to grow tax-free or at a reduced rate.
• Achieve financial goals: Many tax-saving instruments also help you build wealth for the future.

Now, let’s look at some of the best investment options in India to save tax that you can consider.

8 Best Investment Options in India to Save Tax

1. Public Provident Fund (PPF)

The Public Provident Fund (PPF) is one of the safest and most popular tax-saving investment options in India. It offers an attractive interest rate (currently around 7.1%) and comes with the benefit of tax-free returns.

Additionally, the contributions you make to PPF are eligible for a deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh per financial year.

• Tax Benefits: Contributions are tax-deductible under Section 80C.
• Returns: The interest earned is tax-free.
• Tenure: 15 years (extendable in blocks of 5 years).
• Risk: Low-risk, government-backed scheme.

Tip: PPF is ideal for long-term wealth building and for those looking for a secure, tax-free investment option.

2. Employee Provident Fund (EPF)

The Employee Provident Fund (EPF) is a mandatory retirement savings scheme for salaried employees, but it is also one of the best investment options in India to save tax.

Both employee and employer contribute to the fund, and the total contribution is eligible for tax deduction under Section 80C.

• Tax Benefits: Contributions qualify for tax deductions under Section 80C.
• Returns: The interest rate is around 8% per annum and is tax-free.
• Tenure: Funds can be withdrawn after retirement or in cases of job change.
• Risk: Low-risk, government-backed.

Tip: EPF is a great option for salaried individuals looking to save tax while building a retirement corpus.

3. National Savings Certificate (NSC)

The National Savings Certificate (NSC) is another government-backed investment that is eligible for tax deduction under Section 80C. NSCs offer guaranteed returns and a fixed interest rate, making them a popular choice for tax saving.

• Tax Benefits: Investments up to ₹1.5 lakh are eligible for tax deduction under Section 80C.
• Returns: The interest rate of around 6.8% (subject to change), and the interest earned is taxable.
• Tenure: 5 or 10 years.
• Risk: Low-risk, government-backed.

Tip: Ideal for conservative investors who prefer guaranteed returns and are looking for a low-risk tax-saving option.

4. Tax-Saving Fixed Deposits (FDs)

Tax-saving Fixed Deposits (FDs) are a popular investment option for people who want to save tax while earning interest. The interest earned on tax-saving FDs is taxable, but the principal amount is eligible for tax deduction under Section 80C.

• Tax Benefits: Up to ₹1.5 lakh deduction under Section 80C.
• Returns: Generally between 6% to 7% annually.
• Tenure: Fixed term of 5 years.
• Risk: Low-risk, provided you invest with reputed banks.

Tip: Tax-saving FDs are suitable for investors who prefer a fixed income but don’t mind locking their money for 5 years.

5. National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-backed scheme that not only helps in building a retirement corpus but also offers additional tax benefits.

Under Section 80CCD, you can get tax benefits up to ₹2 lakh—₹1.5 lakh under Section 80C and an additional ₹50,000 under Section 80CCD(1B).

• Tax Benefits: Tax deduction up to ₹1.5 lakh under Section 80C and ₹50,000 under Section 80CCD(1B).
• Returns: Market-linked returns; are generally higher than traditional investment options.
• Tenure: You can begin withdrawing at the age of 60.
• Risk: Moderate, as the returns are linked to the market.

Tip: NPS is suitable for those who want to build a retirement corpus with added tax-saving benefits.

6. Tax-Saving ULIPs (Unit-Linked Insurance Plans)

ULIPs (Unit-Linked Insurance Plans) combine life insurance with investment. They allow you to invest in equity, debt, or balanced funds while providing insurance coverage. The premiums paid for ULIPs are eligible for a tax deduction under Section 80C.

• Tax Benefits: Tax deduction of up to ₹1.5 lakh under Section 80C.
• Returns: Returns are linked to the performance of underlying assets.
• Tenure: Varies based on the policy chosen.
• Risk: Moderate to high, depending on the fund selection.

Tip: ULIPs are a good option if you are looking for both tax savings and life insurance protection, though they may carry higher fees.

7. Sukanya Samriddhi Yojana (SSY)

The Sukanya Samriddhi Yojana (SSY) is a government-backed savings scheme designed specifically for the girl child. Parents or guardians can open an account in the name of a girl child under the age of 10. The scheme provides attractive interest rates and tax-free returns.

• Tax Benefits: Up to ₹1.5 lakh deductible under Section 80C.
• Returns: The interest rate is 7.6% (subject to change) and is tax-free.
• Tenure: The account matures after 21 years.
• Risk: Low-risk, government-backed.

Tip: Ideal for parents who want to save for their daughter’s future education or marriage. To know more about this scheme click here- nsiindia.gov.in

8. ELSS (Equity-Linked Savings Scheme)

ELSS (Equity-Linked Savings Scheme) mutual funds are one of the most popular best investment options in India to save tax. ELSS allows you to invest in equity markets and provides tax benefits under Section 80C. They have a lock-in period of 3 years, making them the shortest among all tax-saving options.

• Tax Benefits: Up to ₹1.5 lakh deductible under Section 80C.
• Returns: Higher returns (market-linked) than traditional tax-saving options.
• Tenure: 3-year lock-in period.
• Risk: High risk due to market exposure.

Tip: ELSS is best suited for investors with a higher risk tolerance and a long-term investment horizon.

Read Also: How to Save Money as a Family Man: 12 Practical Tips for Indian Families