Tax saving investments can be a useful way of planning your finances as you work towards goals such as retirement, long term savings or building up a financial buffer for the future. In India the PPF, the ELSS mutual funds and the NPS are all commonly considered as tax saving instruments.
You wouldn't necessarily want to pick an investment simply because it gives you a deduction. The deduction available will depend on the tax regime you're in, your eligibility and the rules that apply. Your investment time frame, your risk appetite and your access to your money are all factors that will be relevant.
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1. Public Provident Fund (PPF)
The Public Provident Fund is a government backed scheme for saving for the long term. It could be the right sort of scheme for someone who wants a saving scheme rather than being exposed to the ups and downs of the stock market.
PPF has a 15 year maturity period with extensions being available under the scheme rules. Under the old regime if you choose it, contributions up to ₹1.5 lakh in a year will qualify for a deduction under Section 80C provided the conditions are met. Both interest and the eligible maturity proceeds are eligible for tax benefits under the current rules.
The primary consideration is liquidity. As it's a long term savings scheme it may not be appropriate for funds you expect to require in the near term.
2. Equity Linked Savings Scheme (ELSS)
ELSS is a category of equity mutual funds which invests primarily in shares and equity related instruments. It offers the potential for long term market linked returns along with the benefit of a tax deduction under Section 80C in the old regime.
ELSS has a 3 year lock-in period (generally the shortest of the Section 80C investments). It can be invested in as a lump sum or via a SIP. Each SIP instalment has its own 3 year lock-in period.
PPF returns are guaranteed. ELSS returns are not. The value of ELSS will vary with the equity market so investors should consider their risk profile and investment horizon before investing.
3. National Pension System (NPS)
The National Pension System is intended to be a mechanism for people to save for retirement via market-linked investments. The allocation of the contributions will vary depending on the investment option chosen, with the funds being invested in equity, corporate debt, government securities and other permissible instruments.
Eligible contributions to the NPS can qualify for a deduction under Section 80CCD(1) (within the relevant overall limit) and an additional deduction of up to ₹50,000 is available under Section 80CCD(1B) in the old regime.
Employer's contributions to eligible NPS accounts may be eligible for separate benefits under Section 80CCD(2) subject to the relevant limits and conditions (including under the new tax regime). The withdrawal and annuity rules should also be borne in mind prior to investing.
NPS could be relevant in the context of retirement planning but the conditions under which you can withdraw from it are such that it's quite different from an investment you'd use for a short term objective.
4. Other Tax-Saving Options
Beyond PPF, ELSS and NPS there are a number of other investments or eligible expenses which can be used to reduce your taxable income under the old regime.
- Employee Provident Fund (EPF): the employee's contribution is eligible under Section 80C.
- Tax saving fixed deposits: eligible 5 year bank FDs can qualify under section 80C (though of course premature withdrawal is generally not permitted).
- National Savings Certificate (NSC): 5 year maturity, may be eligible for deduction under Section 80C subject to the relevant rules.
- Eligible life insurance premiums: Premiums may be deductible subject to the prescribed limits and conditions.
- Health insurance premiums: Premiums which are eligible may be claimed under Section 80D under the old regime (subject to the relevant limits and conditions).
Each option will have different levels of liquidity, risk, maturity and tax characteristics. You should compare those characteristics rather than making your investment choice on the basis of the deduction alone.
5. Check Your Tax Regime Before Investing
The new tax regime is the default regime and in general does not allow for deductions such as Section 80C and Section 80D. Certain benefits do remain available (e.g. eligible employer NPS contributions under Section 80CCD(2)) subject to the rules.
If you opt for the old regime, eligible tax saving investments and expenses can reduce your taxable income. The total Section 80C limit of ₹1.5 lakh is shared between the eligible investments and the eligible expenses covered under the various provisions.
Before you make any further investments, work out your tax liability under both regimes. The ITD have an official calculator which will enable you to compare the two figures.
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Make Tax-Saving Investments Part of Your Financial Plan
Tax planning is at its most effective when it's in support of your wider financial objectives. PPF will be ideal for long term savings, ELSS will give you exposure to the equity market and NPS is the vehicle of choice for retirement planning. Other eligible investments may be appropriate in certain circumstances to complement these.
Invest via a suitable platform (e.g. Ashika Dhanush) where the relevant investments are available, though of course your tax eligibility will depend on the particular product and the rules in force at the time. Take a good look at your existing investments before you put any more money in and if in doubt as to which regime or deduction you're entitled to, seek the advice of a qualified tax professional.
Frequently Asked Questions
If I have already invested in PPF, can I also claim a deduction for ELSS in the same financial year?
Yes. Both qualify under Section 80C in the old tax regime, but their combined eligible amount, along with other qualifying investments and expenses, cannot exceed the overall limit of ₹1.5 lakh.
Does the three-year lock-in for ELSS mean I can withdraw my entire SIP investment after three years?
Not necessarily. Each SIP instalment completes its own three-year lock-in, so instalments made later will become eligible for redemption later.
What happens to my PPF account when the 15-year maturity period ends?
You can withdraw the eligible maturity proceeds or extend the account under the scheme rules. Extension options and their conditions should be checked before deciding what to do with the balance.
Can I claim the ₹50,000 NPS deduction if my employer also contributes to my NPS account?
The additional deduction under Section 80CCD(1B) is for eligible individual contributions. Employer contributions are covered separately under Section 80CCD(2), subject to applicable limits and conditions.
If I choose the new tax regime, is there any reason to continue investing in PPF, ELSS or NPS?
Yes, if they fit your financial goals. However, deductions under Sections 80C and 80CCD(1B) are generally unavailable under the new regime. Consider the investment's purpose, risk, lock-in and withdrawal rules separately from its tax benefit.
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