Which Tax Saving Financial Instrument Is The Perfect One For You?

It is that time of the year again, but don't worry, we got you 'covered'.

Tax saving options

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It is that time of the year again when we start looking out for the right kind of tax-saving opportunities, including doing our research on tax-saving financial instruments. If you too happen to find yourself riding the same boat, then you’re in the right place, for here’s a quick comparison of different financial instruments to help you figure out which one works the best for you.

#1 Life Insurance Policies

The reason we're putting life insurance policies at the top because the fact remains, no matter what your financial plan is, a life insurance policy is the ultimate lynchpin. Without it, your portfolio simply isn't complete as without it, the future of the people you leave behind is up in the air. Up until a few years ago, the thumb rule for choosing the best life insurance policy was to not look at it from a tax-saving lens, but instead to go with the one that offered the best payouts. But over the last few years, insurance providers have really upped their game and now have a wide range of term plan options that while providing great flexibility and benefits, also work towards saving taxes for the person paying the premium. HDFC Life’s Click 2 Protect Life is one such term plan. Premium(s) paid by an individual or HUF under this plan are eligible for tax benefits under Section 80C of the Income Tax Act, 1961, subject to the conditions/ limits specified therein. Under Section 10 (10D) of the Income Tax Act, 1961, the benefits received from this policy are exempt from tax. On top of that, this term plan also provides added benefits such as Life Protect Option, Death Benefit, Maturity Benefit, and many more. You can read the details of the term plan here.

#2 Equity Linked Savings Scheme (ELSS) Funds

Even though the markets have lately been precarious, experts believe a correction is around the corner. And even though the reason why you’re reading this article is ‘tax-saving’, you cannot ignore the fact that ELSS funds have yielded the highest returns in the past five years. Which is why even though it is common knowledge that gains of over Rs. 1 lakh from equity funds are taxable, they are still one of the most popular tax-saving options out there.

#3 National Pension Scheme

NPS has become more investor friendly over these last few years. The entire 60% of the corpus withdrawn at the time of retirement is tax free. Younger investors can now allocate up to 75% to equities. It has been delivering at average of 8-11% returns, but it’s more geared towards those looking to make long term gains, because these do not necessarily deliver the best returns for short to medium durations.

#4 ULIPs

While their returns are not as high as ELSS funds, ULIPs have a distinct tax advantage over them. They are more flexible because investors can switch from equity to debt (or vice versa) depending on their reading of the market. On top of that, there are no tax implications of the gains made from such switching because the income from ULIPs is tax free.

#5 PPFs

For those who do not mind the long lock-in period, the Public Provident Fund is a decent tax-saving option, especially for those who want to shift their capital from fixed deposits to higher interest-earning options. Even though the returns are never as high as ELSS funds or ULIPs, PPF is still one of those timeless investments where you can never go wrong.

Now that you know how each of the above financial instruments work, you are well-equipped with the knowledge about which one(s) to go for. Ideally, start by not putting all your eggs in the same basket, and then diversify. With a good mix of insurance, pension and mutual funds, you can never go wrong.