Tax saving instruments are options available to individuals, firms or institutions to reduce their respective income tax liability. The government offers tax exemption on these instruments to promote investments into schemes offered by public or private financial institutions that provide benefits (in terms of insurance or return) for the investor, and provides funds to be used in development projects.
Equity Linked Savings Scheme (ELSS): ELSS investments are eligible for tax exemption up to the maximum limit of Rs. 1.50 Lakh under section 80C of Income Tax Act. However, investments made in ELSS have a lock-in period of 3 years.
Public Provident Fund (PPF): PPF is a long-term tax saving government-backed investment scheme that enjoys an EEE (exempt, exempt and exempt) status, i.e. contribution made toward the PPF account, interest earned and maturity proceeds are all tax exempted. Annual contribution up to the maximum limit of Rs. 1.50 Lakh is eligible for tax exemption under section 80C of Income Tax Act.
PPF has a maturity period of 15 years that can be further extended by 5 years. No withdrawals are permitted for first 7 years from data of initiation, after which only one partial withdrawal of up to 50% of PPF balance is permitted in every financial year cycle. The interest rate on the PPF balance is reset on a quarterly basis.
National Pension Scheme (NPS): NPS helps provide tax exemption under multiple sections of the Income Tax Act.
Annual contribution up to the maximum limit of Rs. 1.50 Lakh can be claimed for tax exemption under section 80C
An additional deduction of up to Rs. 50,000 can be claimed under section 80CCD 1(b)
However, no withdrawals can be made from the NPS before retirement, except in some specific situations. Also, annuity pension paid after retirement is considered as income and is taxable.
Other Targeted Tax Savings Instruments:
Sukanya Samridhi Yojana (SSY): Particularly designed for a girl child with an interest rate of 8+% per annum; opened after birth of a girl child till age of 10 and remains operative for 21 years from date of opening or till girl's marriage after the age of 18, whichever happens earlier.
Senior Citizens Saving Scheme (SCSS): Particularly designed for senior citizens (60+ age) with an interest rate of 8+% per annum; lock-in of 5 years, however premature withdrawal is allowed in case of financial emergencies