Three Tax-Saving Investment Options to Generate Tax-Free Income

Investments are vital to combat inflation. Considering its necessity, people often want to invest but are reluctant due to underlying risks and low returns. Moreover, the profits earned can also be subject to tax, which deters them from investing.

However, some instruments not only offer tax benefits but also help in the diversification of risk. Such investments can begin with a small amount and provide steady returns, thus helping wealth creation. HDFC Bank tax-saving products not only help you create wealth but also ensure tax savings.

Let’s look into some tax-free investment instruments.

  • Public Provident Fund

    Public Provident Fund (PPF) is a preferred investment scheme owing to its steady and safe returns. PPF interest is subject to revision every three months. Currently, it is at 7.1% per annum (1st April 2021 to 30th June 2021). You can invest in PPF for 15 years, and further extend it for a block of five years. If you are looking for instruments not subject to market risks, you can invest in PPF to receive tax-free income. You can avail of tax benefit on PPF in the form of deductions for the amount deposited under Section 80C. Moreover, it falls under the Exempt-Exempt-Exempt (EEE) category. Along with the amount deposited, the accumulated amount and the interest received at the time of withdrawal is also exempt from tax.

    Here’s how you can open a PPF Account now.

  • Employee Provident Fund

    If you contribute more than the mandated 12% towards EPF, it counts as Voluntary Provident Fund (VPF). Effective from April 1, 2021, interest earned on EPF contributions over and above more Rs. 5 lakh per year will be taxable as per your respective income tax slab. In fact, the exemption limit has been revised upward from Rs 2.5 lakh announced earlier as part of Budget 2021. However, back of the envelope calculations clearly show that you can still earn up to 5.95% interest after accounting for 30% tax on VPF contributions. This is a competitive rate of interest given that FD yields have been steadily dropping year on year.

    Read more about the benefits of the PPF account here.

    Here’s how you can open a PPF Account now.

    Read more about the benefits of the PPF account here.

  • Unit-Linked Insurance Plan

    An insurance policy helps you prepare for an unexpected financial emergency, like the untimely death of the taxpayer in your family. It can also help you avail of deduction on the premium paid on the policy under Section 80C, up to a limit of Rs 1.5 lakh. Also, if you invest in equity-based insurance schemes like Unit-Linked Insurance Plan (ULIP), you get the combined benefit of insurance and investment. When you pay premiums on ULIP, a small amount goes towards insurance and the remaining as regular mutual fund investments. While the premium is deductible under Section 80C of the Income Tax Act, the amount you withdraw after the maturity of the policy is also tax-free. It is important to note that if you pay more than Rs 2.5 lakh aggregate (combined value) by way of premium towards two or more ULIPs per year, you will be assessed tax on the maturity value (applicable only on new policies purchased on or after 1st Feb,2021.)

  • Sukanya Samridhi Yojana

    Sukanya Samriddhi Yojana Account (SSY) offers the highest tax-free return while helping to create a corpus for your daughter. You can open a Sukanya Samriddhi Account in your daughter’s name with HDFC Bank if she is less than ten years of age. You can deposit a minimum amount of Rs 1,000 in this account, which would be operative until she attains the age of for 21 years or until she is married, after the age of 18.

    You can claim a tax-benefit on SSY by availing deductions under Section 80C. You can claim a deduction of the amount you deposit in the account up to Rs 1.5 lakh. Moreover, the corpus fund you receive upon maturity of the fund would be tax-free income.

    While various instruments could offer you steady returns, look for those that also help you earn tax-free income. Investing in such instruments will not just increase your wealth gradually but also help you reduce your tax liabilities.

Under Section 80C of the Income Tax Act, 1961 you can save tax by investing in Tax saving Fixed Deposit. Calculate using FD calculator.

* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.