Understanding the intricacies of Income Tax is difficult for many. Some do get it — how taxes work, how to declare investments, file Income Tax Returns, and choose a tax slab that provides tax benefits. But even then, they turn to tax professionals for help.

The sole aim of every taxpayer in India is to save tax. You must be familiar with terms like Section 80D, Section 80C, HRA exemption and so on which helps you save income tax. But do you know what falls under each section, or better yet, which of the many tax-saving instruments should you invest in to reduce your income tax burden?

To answer these questions, here is a list of the top 9 tax-saving options that can help you reduce your tax liability for FY 2022-2023.

1.    National Pension Scheme (NPS)

Experts suggest that NPS wasn’t all too popular a few years ago. But now, the scheme has become an attractive option for investors. If you must know, at the age of retirement, almost 60% of the funds locked in NPS can be withdrawn without drawing any tax.

What’s more, older investors who have retired or are on the verge of retirement can continuously invest in NPS until the age of 70 years. As for young investors, they can invest upto 75% in equities.

There is a catch though — the yield in the short or long term isn’t very high. But the tax benefits are. For instance, under the NPS scheme, upto ₹1.5 lakh can be claimed as a deduction under Section 80C. Investors can even ask their employers to allocate 10% of their basic salary towards NPS which will not be taxable.

The icing on the cake is the extra ₹50,000 deduction that can be claimed under Section 80CCD(1b).

2.    Public Provident Fund (PPF)

 PPF isn’t quite popular amongst investors because of the lower rate of interest that hovers in the 7-7.2% range. But it’s a savings scheme that scores high on taxability. Moreover, it’s a safe and flexible investment option.

A PPF can be opened at a post office or any PSU bank. That said, some private banks also provide the option to invest in a PPF. Experts suggest that in order to save more taxes, investing in a PPF is far better than Fixed Deposits.

The only drawback of PPFs — apart from the lower rate of interest — is the lock-in period. PPFs usually have a tenure of 15 years from initial investment. When the funds mature, you can extend a fixed period of 5 years each.

3.    Equity-Linked Savings Scheme

The equity market is not for the faint-hearted; many believe that the government and tax officials will regulate the market sooner than later. Moreover, any long-term capital gains linked to equity that go over and beyond the ₹1 lakh figure now draw tax.

Despite all of that, ELSS funds remain an exceptional tax-saving scheme for investors. Not just that, ELSS costs are relatively low, returns are high, and there is complete transparency into where they’re invested.

As long as you’re KYC compliant, ELSS investment is easy. There are many portals and NBFCs that make investing in ELSS effortless. The only downside of ELSS funds is its volatile nature which is solely dependent on the stock market.

As a result, the risk factor is more suited for long-term investors who invest in ELSS funds via SIPs. Financial experts suggest that investing a lump sum figure in ELSS isn’t the right thing to do; investors must adopt a staggered approach over the course of 2-3 months, wherein the investments must be made in cyclic installments before the end of the financial year.

4.    Unit Linked Insurance Plan(ULIP)

Although ELSS does provide high return and tax saving options, it falls way behind Unit Linked Insurance Plan (ULIP) in terms of the taxes that can be saved. What’s more, an investor, after carefully understanding market trends, can quickly switch from debt to equity and vice versa, making it more flexible than ELSS.

You’ll also be glad to know that switching between equity and debt doesn’t attract any tax. So, what is the drawback of ULIPs? Insufficient cover. It’s a type of life insurance cover after all with the benefit of investment which doesn’t provide as much cover as other traditional life insurance policies. Also, since it’s a long-term investment, an investor will have to continue investing or risk liquidity.

5.    Life Insurance Policy

Since we’re on the topic of life insurance policy, it’s best to look at this investment option and compare it right away with ULIPs. So, is it any good?

Experts suggest that it’s the worst option on this list to save tax. For instance, if you take a term plan, you always miss out on the investment component as the premium that you pay for it is diverted toward mortality.

The premium that you pay might only be a fraction of what you would shell out for an endowment plan or a money back plan, but the returns are low and the entire instrument is totally inflexible (even though you’re guaranteed returns and a maturity corpus that is tax-free).

6.    National Savings Certificate (NSC) Scheme

The NSC scheme is a fixed-income investment scheme, one which was popular amongst investors for its high rate of interest and the tax relief. But investors are slowly moving away from this instrument after the government made the controversial decision to link the rate of interest with bond yields.

Today, NSC offers a rate of interest that is slightly higher than FDs (which we’ll talk about later). But it still attracts investors because of its 5-year lock-in period, assured returns, and the government’s commitment to cover payments in case of a default. NSC does not require you to make a long-term commitment and the returns are not locked away for several years.

But that’s not all. Investing in NSC means subscribers will be able to get interest income, which is eligible for deduction Under Section 80C of the Income Tax Act.

7.    Sukanya Samriddhi Yojana

Investors with a daughter (aged below 10 years) in their family can invest in this scheme to save tax. The cap on investment on this scheme is ₹1.5 lakh with no taxes levied on the interest income, just like the PPF.

In fact, the Sukanya Samriddhi Yojana offers the highest rate of interest at 7.6% amongst all other small savings schemes. Investing is also easy. You can open up an account and invest a minimum of ₹1000 at a post office or any other designated banks. What’s more, the account can be opened in the name(s) of the child and the maturity amount can be spent on her marriage and education.

Keep in mind that an investor can open only one account for a maximum of two daughters in the family. This also means, one account for two daughters, or the total investment in such a case cannot exceed ₹1.5 lakh per year. Also, the rate of interest can fluctuate every quarter since it’s linked to government bond yields.

8.    Fixed Deposits

Tax-saving fixed deposits, according to financial experts, are ideal for investors who are on the hunt for investment options as they’ve delayed their tax planning. Yes, they’re tax-saving instruments for sure, but they offer nothing else of value in return.

Not even decent rates of interest because they’re relatively low. Most believe otherwise, but the rate of interest which investors think they’ll get is reduced even further because tax is levied on interest, which means that investors who fall in the 30% tax slab get an interest rate which is lower than 5%.

The only saving grace for FDs is the ease and speed at which an account can be opened. All you need to do is log into your netbanking account and start up a Fixed Deposit plan. And this can be done anytime and from anywhere.

9.    Pension Plans

A retirement corpus is a must-have for investors. They want it, the government does too, and so does the insurance industry. But retirement savings (pension plans) don’t offer the same benefits.

For instance, today, an investor can divert his income to government-run pension plans and/or retirement saving schemes set up by insurance companies. But the latter isn’t eligible for the ₹50,000 tax deduction offered under Section 80CCD(1b), while NPS is.

What’s more, NPS subscribers who aren’t satisfied with the performance or service of a designated pension fund manager can move to another. This flexibility isn’t available to pension plans by insurance companies; the subscriber must carry on with the insurance provider until the pension plan matures.

This list of tax-saving investments is only to guide investors about what’s available today. Of course, there are many other tax-saving instruments and investments (below) that can help save taxes.

  • Health Insurance Premium
  • Donations To Charitable Institutions
  • School Tuition Fees (of dependent children)
  • Repayment of Education Loans
  • Rent and HRA
  • Interest on Home Loan
  • Medical Expenses Towards Disabled Dependent
  • Treatment of Specified Illnesses

Investors must be careful not to invest in all schemes and only choose those that not just help save taxes but also provide better returns. And that is why it’s important to assess your options carefully (and consult a financial expert) before deciding.