Many of us only pay attention to taxes when we get the clarion from the Income Tax Department or our chartered accountants or employers that, “It is that time of the year when you show that you are a good citizen and pay taxes!” It would not be erroneous to claim that the existence of a person who loves paying taxes is doubtful and when you have to take stock of your tax scenario your reaction isn’t going to be like you won the lottery. 

Those who have never been bitten by the finance bug can have a hard time understanding taxes and investments. Due to lack of awareness, many taxpayers end up investing in financial instruments that may or may not be suited for them. Yes, you can always seek help from experts but that comes at a price and affordability can be a problem for many people.

Tax-saving is one such area where a majority of taxpayers struggle and inadvertently end up with higher tax liabilities than they would have if they had the right tax-saving strategies. If you find this relatable, here is a list of tax-saving instruments that can make your tax-planning journey easier.

Risk-free tax-saving instruments

1) Employee provident fund: The objective of the Employee Provident Fund (EPF) scheme is to promote savings so that employees can use the corpus post-retirement. The employer and the employee both make monthly contributions amounting to 12% of the employee’s salary to the Employees’ Provident Fund scheme. EPF is a collection of funds contributed by the employer and his employee regularly on a monthly basis. A fixed rate of interest is accrued on these contributions. The interest and the deposit do not attract any taxes, i.e. you may withdraw the corpus without having to pay any taxes.

2) PPF: The Public Provident Fund (PPF) scheme is a long-term investment option that earns you interest on your investment amount. At present, the rate of interest is 7.1% p.a., compounded annually. You will have to stay invested for 15 years and you can extend the investment duration by five years. The minimum and maximum investments allowed in a financial year are Rs.500 and Rs.1.5 lakh, respectively. You will have to make at least one deposit a year for 15 years and your account can only be closed on maturity. Partial withdrawal is allowed after the sixth year. Neither the deposit nor the interest is taxed on withdrawal.

3) Sukanya Samriddhi Yojana: This is for all of you who have daughters less than 10 years of age. This scheme is a part of the government’s ‘Beti Bachao, Beti Padhao’ campaign. Upto two accounts per family – one for each girl child – is allowed. Your investment will mature in 21 years from the time of opening the account. The interest rate is reviewed quarterly by the Government and currently, it is 7.6%. The minimum annual contribution is Rs 500, and the maximum that you invest in a financial year is Rs.1.50 lakh. Also, you will not have any tax liabilities for the principal, interest earned, or maturity amount.

4) Tax-saving FDs: These are fixed deposits in which you can invest and claim maximum tax deductions of up to Rs 1.5 lakh. The interest rate hovers in the range of 5% – 6% and the lock in-period is five years. You can only make a one-time lump sum deposit and no premature withdrawals. The minimum amount that can be deposited is Rs 1,000 and the maximum amount is Rs 1.5 lakh. The interest on your FD is taxable but you can avoid TDS by submitting Form 15G or Form 15H (in case you are a senior citizen) to the bank.

5) ULIPS: The right tax planning strategy should incorporate elements that aid in wealth creation and tax saving without the investor having to go over and beyond their risk taking abilities. A Unit Linked Insurance Plan (ULIP) is one such product that helps investors meet their investment and tax saving objectives along with ensuring insurance coverage through a single integrated plan. ULIP is a multi-faceted product that serves the dual purpose of insurance and investment. When you invest in ULIP, a part of the premium is invested in shares/bonds, etc., and the balance amount is utilized in providing an insurance cover. You can switch your portfolio between debt and equity based on your risk appetite and the fund is professionally managed so that you are spared the trouble of tracking the performance of the underlying assets. The premium paid towards a ULIP is eligible for a tax deduction under Section 80C and the payout on maturity is exempt from income tax under Section 10(10D) of the Income-tax Act.

HDFC Life Click 2 Wealth is a ULIP plan that offers market-linked returns and can take care of all your tax-saving hassles. You can choose from 10 funds to maximize your investment and you also have the option to make unlimited switches so that you can move away from funds if their performances are not satisfactory. You will have to pay nominal charges for fund management and the mortality charge towards your life cover and 1% of the premium allocated will be added to your funds for the first five years. The plan can also come in handy in your retirement years as you will have the facility of systematic withdrawal from your funds for post-retirement income. In the case of the event of the subscriber, all future premiums will be waived off and the fund will stay invested.

Tax-savers that carry risks

1) ELSS – Equity-linked savings schemes let you reap the dual benefits of tax saving and capital appreciation equities. These are open-ended mutual funds that are eligible for tax deductions under Section 80C. However, LTCG taxes are applicable (an LTCG tax of 10% is applicable if the long-term capital gains are more than Rs 1 lakh). You will have to stay invested for a minimum period of three years. In ELSS schemes, approximately 65% of the capital is invested in equities and equity-linked securities. ELSS funds have a heavy weightage of equity investments which makes them vulnerable to market volatility and hence they are riskier than tax-saving instruments that offer guaranteed returns.

2) Annuity Plans: Annuity plans are pension funds that invest in equity as well as debt instruments and also provide tax-saving benefits and a retirement corpus. The returns from these funds depend on the proportion of investment in debt and equity instruments as well as the skills of the fund manager. You can either invest in deferred annuity plans (in this your pension payouts start after a buffer period) or immediate annuity plans (pension payouts start immediately). Pension fund contributions are tax-deductible up to Rs 1.5 lakh under Section 80CCC of the Income Tax Act. The tax liability on the accumulated amount and the maturity proceeds will vary based on the type of plan. As these plans have equity investments, their performance is subject to market conditions and an equity-heavy portfolio can carry higher risks.

3) National Pension Scheme: This scheme was introduced in 2009 to provide social security to retired citizens and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Any Indian citizen between the age of 18 and 60 years can invest. Employees from the private, public and unorganised sectors—except defence personnel and officers—can invest in the NPS. On opening the account you will be provided with a unique Permanent Retirement Account Number (PRAN). There are two accounts in the NPS: Tier I Account and Tier II Account. Tier I is a compulsory account, where withdrawals are permitted only post-retirement, whereas Tier II is a voluntary account allowing withdrawals. Investments can be spread across various asset classes, including equities – the government has capped equity investments to a maximum of 50%. The returns of the corpus created under the NPS scheme depends on the performance of the underlying assets such as government securities, corporate bonds and equities and hence, there are chances of market fluctuations affecting the overall returns.

Tax-saving instruments should be picked after careful considerations of the risk level, lock-in period, liquidity, and returns. Opting for tax-saver products that do not suit your individual needs or are not aligned with your overall financial objectives defeat the purpose. It also helps to stay updated about the latest developments in the world of taxes to make the most of tax-saving investments.