9 Financial products and their tax benefits

As a taxpayer, every person is allowed to legally reduce their tax liability to the fullest extent. With some smart planning, you can create your financial assets as well as save on tax.

9 Financial products and their tax benefits

When investing in financial products, one generally looks at the return percentage, lock-in period, and safety (or degree of risk) of the investment. For the savvy investor, there is one more factor that needs to be kept in mind, and that is the tax implication of the investment made. 

If you have taxable income, it would be wise to take advantage of certain specified investments that can reduce your tax outgoing on a year-on-year basis. Under the Income Tax Act, 1961, certain sections seek to incentivise an individual to make good investments by providing tax exemptions and tax benefits. By using these provisions judiciously, one can not only save on taxes but also implement proper financial planning. 

The primary section offering deduction in IT returns is Section 80C. Under this, deductions are offered for certain investments up to a maximum amount of Rs 1.5 lakh. Let’s look at some financial products and the tax benefits they offer. 

1. Bank fixed deposits

Investments in bank fixed deposits can be tax-exempt, provided they satisfy certain conditions These fixed deposits have a lock-in period of five years. They can be opened by any resident individual. However, the interest earned on them is taxable.

Related: EEE Tax Benefit 

2. PPF, EPF, and VPF

Public Provident Fund (PPF) is an investment scheme that has an initial lock-in period of 15 years with extendable periods of blocks of five years, though they do allow partial withdrawal for specified reasons after seven years. It is an ideal means to save for retirement expenses as well. 

This is a trusted investment avenue since it can be opened by a resident individual for themselves as well as for their minor children. Investments are guaranteed and, along with the returns, are tax-free under Section 80C of the Income Tax Act. The minimum annual investment is Rs 500 and the maximum is Rs 1.5 lakh, jointly shared between the parents and the minor child’s account. 

Employee Provident Fund (EPF) is available to salaried employees. Both the employer and the employee contributions in a specified ratio towards this fund. During the contributory years, the employee’s share is tax-free. If at the time of withdrawal the whole amount is withdrawn after five continuous years of service, the entire amount will be tax-free. If you want to know more about EPF, read this. 

Voluntary Provident Fund (VPF) kicks in when the employee specially requests that a larger part of their salary be debited to the VPF than is compulsorily required under EPF. This has a lock-in period, so employees should be careful while opting for this.

Type of product: EEE

Maximum tax benefit: Rs. 1,50,000

Related: All you need to know about PPF Scheme

3. SCSS, SSY, NSC etc.

There are certain postal-linked and government-approved savings schemes in which investments benefit from Section 80C. These include the Senior Citizens Savings Scheme (SCSS), Sukanya Samriddhi Yojana (SSY) for the girl child, and the National Savings Certificate (NSC).

A common benefit of these schemes is that they are safe investments that are tax-exempt. There are many other schemes such as NABARD bonds, ULIPs, contribution to notified pension schemes, etc.

a. SCSS

Type of product: ETE

Maximum tax benefit: Section 80C upto 1,50,000 and Section 80TTB for interest earned upto 50,000 a year 

b. SSY

Type of product: EEE

Maximum tax benefit: Section 80C upto 150,000

c. NSC

Type of product: ETE - but the interest amount can be claimed as a further investment under section 80C for exemption

Maximum tax benefit: Rs. 1,50,0000

4. Mutual fund ELSS 

Equity-linked savings schemes (ELSS) are mutual funds that are eligible for tax deduction under Section 80C. They have a lock-in period of three years and come in growth options as well as dividend options. 

ELSS is not a guaranteed form of investment, but with a little research, one can find mutual funds with good performance ratings and invest long-term in the same. In case of long-term investments, equity-linked funds give the best returns. A good tip is to diversify across some reputable ELSS funds. This will not only save you tax but also help meet your long-term financial goals.

Type of product: EEE till 2018 now EET (gains above 1 lakh subject to 10% LTCG if units held for over a year)

Maximum tax benefit: Rs. 1,50,000

Related: 5 lesser-known facts about tax benefits of health insurance 

5. Life insurance

Premiums paid for life insurance of the taxpayer or his dependent wife and children are tax-deductible under Section 80C. The amount is deductible if the premium is less than 10% of the sum assured. 

Type of product: EEE - if premium is less than or equal to 10% of sum assured, else EET.

Maximum tax benefit: Rs. 1,50,000

6. Repayment of housing loan

When a housing loan has been taken for a residential property, the repayment of the principal and interest amount can be allowed as a deduction under Section 80C. This lessens the financial burden of purchasing a house. This benefit is also available for repayment of stamp duty, registration fees, and transfer fees. 

It is beneficial to take a housing loan even if you don’t need it, and reap the benefit of investing in other avenues while getting a deduction on repayment of loan and interest. 

Maximum tax benefit: 

Principal amount, stamp duty, registration fees - upto Rs. 1,50,000 under Section 80C

Interest on loan under Section 24 - 2,00,000 for self-occupied and no limit for rented out

Section 80EE - interest on loan 50,000 for first-time buyers.

Deduction claimed for interest paid on loans claimed for affordable housing has been increased by Rs 1.5 lakh to Rs 3.5 lakh

7. NPS 

National Pension Scheme (NPS) allows an individual to make investments up to Rs 50,000, which are exempt from tax under Section 80CCD(1B). If you are in the highest tax bracket (which in India is 30%, not including surcharge) you save approximately Rs 15,000 in taxes with just this Rs 50,000 investment. 

Type of product: EEE

Maximum tax benefit: Section 80C Rs. 1,50,000 (subject to certain limits) and  under Section 80DDB(1B) additional Rs. 50,000

Related: How NPS has performed in the past 5 years

8. Interest payment on education loans

Under Section 80E, interest paid on loan taken for the higher education of self, spouse, or dependent children are eligible for a tax deduction. This deduction is available for a maximum period of eight years or till interest payments stop, whichever is sooner. It is beneficial to take a loan and avail of the benefit of this tax-deductible interest while investing your capital in tax-exempt securities.

Maximum tax benefit: Interest paid on loan taken for the higher education of self, spouse, or dependent children under Section 80E

Related: Types of pension plans and their tax benefits 

9. Health insurance

Payments made towards the medical health insurance of the individual, spouse, or dependent children are tax-deductible. This deduction is available for Rs 25,000.

If the person is paying health insurance costs for dependent parents, an additional deduction of Rs 25,000 is available. If the dependent parents are aged above 60, this additional deduction is Rs 30,000. If both the taxpayer and his dependent parents are above 60, the maximum deduction allowable will be Rs 1 lakh. Health insurance is a safeguard against future emergencies such as illness and should be considered as an investment. 

This is by no means an exhaustive list; the sections are numerous, as are the related financial instruments. So, as a savvy planner, you have to find the best way to maximise your investments while minimising your tax payouts. 

Take a look at the tax benefits that are offered after retirement and start planning your life post-retirement proactively. 

Maximum tax benefit: 25000 - (For individual, spouse, or dependent children)
Additional deduction of Rs 25,000 (For Parents)
Additional deduction of Rs 30,000 (For Parents aged above 60)
Maximum deduction of Rs 1 lakh (If both taxpayer and parent is above 60)

To summarise: 

Product Category Tax benefit and maximum investment amount (In ₹) Lock-in period
Bank Fixed Deposit - lock-in period of 5 years Maximum: No cap Tax benefit: Up to Rs 1.5 lakh under Sec 80C 5 years
PPF Maximum: Rs 1.5 lakh Tax benefit: Up to Rs 1.5 lakh under Sec 80C 15 years extendable by blocks of 5 years. Partial withdrawal after 7 years.
EPF Maximum: Employee 12% of salary Tax benefit: Up to Rs 1.5 lakh under Sec 80C Tax-free after 5 continuous years of service
VPF Maximum: No cap Tax benefit: Up to Rs 1.5 lakh under Sec 80C Tax free after 5 continuous years of service
SCSS Maximum: Rs. 15 lakh Tax benefit: Up to Rs 1.5 lakh under Sec 80C and up to Rs. 50,000 a year for interest earned under Sec 80TTB 5 years with one extension for 3 years - premature withdrawals allowed but with penalty
SSY Maximum: Rs. 1.5 lakh Tax benefit: Up to Rs. 1.5 lakh under Sec 80C 21 years - but premature withdrawals allowed for marriage, education, on death of child etc.
NSC Maximum: No cap Tax benefit: Up to Rs 1.5 lakh under Sec 80C 5 years
Mutual Fund ELSS Maximum: No cap Tax benefit: Up to Rs 1.5 lakh under Sec 80C 3 years - no early withdrawal
Life Insurance Maximum: No cap Tax benefit: Up to Rs 1.5 lakh under Sec 80C 2 years and for ULIP - 5 years
Repayment of housing loan Maximum: No cap Tax benefit: Check the information above Home should be held for a minimum 5 years after deduction is claimed
NPS Maximum: Up to Rs. 1.5 lakh in Tier 1 Tax benefit: Up to Rs 1.5 lakh under Sec 80C Rs. 1.5 lakh and an additional Rs. 50,000 under Sec 80DDB(1B) At retirement, 60% withdrawal can be done, before that 25% after elapse of 3 years for specified reasons such as medical treatment or higher education only.
Interest payment on education loan Tax benefit: The interest paid on the education loan Deduction available for 8 years only
Health insurance Tax benefit: upto 1 lakh (If both taxpayer and parent is above 60) NA