How to Save Tax: 57 Best Tax Saving Investments in India in 2018

Last updated: August 1st, 2018

how to save taxEveryone wants to save tax and increase their income.

However, with so many ways to save tax, it is not easy to choose the best tax saving investment.

Consider this scenario:

Varun, an employee in a well known company, wants to save tax on his salary.

His father, a retired government employee, wants him to invest in PPF and bank FDs to save income tax.

The friendly next-door aunty, his mother’s friend and a well wisher, advises him to take a LIC policy. She is a LIC agent herself and she would be able to help him choose the best plan.

His bank calls him up and asks him to invest in a ULIP, which is the best tax saving option, they say.

His senior colleague advises him to invest in ELSS, which would give him great returns.

Now Varun is confused. He wants to save tax but does not know what would be the best tax saving investment.

His father asks him to stay away from risky investments like mutual funds. The aunty says ULIPs are expensive and a LIC policy would be better. His colleague says bank FDs and LIC policies give poor returns.

So what does Varun do?

I am sure many of you have faced a similar situation.

To make things easier for you, I have listed out 57 easy and legal ways to save tax in India.

You might already know some of these ways, but I am certain that you will find at least a few new ways of saving tax.

Additionally, you will know which are the best ways of saving tax, and which ones to avoid. So next time you make an investment to save tax, you will not have to worry about whether you have made the right decision.

Jump to the section that interests you

How to Save Tax in India

How to save tax under 80C

save tax1. ELSS Funds

Expected returns: ~14% (last 3 years returns for top rated ELSS funds)
Tenure: 3 years lock in from date of investment
Rating: 5 star

Equity Linked savings schemes (ELSS) are diversified equity mutual funds with a lock in period of 3 years. Investments in ELSS are exempt from tax upto a limit of 1.5 lacs per year.

ELSS funds offer by far the best returns among all the investment options under 80C. However, since they invest in equities, it also involves some amount of market risk. Therefore, it is better to invest in ELSS funds for the long term.

The 3 year lock in period is applicable from the date of investment.

For example,

A SIP investment made in April 2018 will have a lock in period upto March 2021. The next SIP instalment, made in May 2018, will have a lock in upto April 2021, and so on.

So if you make a monthly SIP investment for 3 years, the entire amount will be available for redemption only after 6 years (first instalment – April 2018 lock in till March 2021; last instalment March 2021, lock in till February 2024).

This is good thing, since the longer you stay invested, the greater your chances of better returns, and lower your risk. Of course, you can make partial redemptions as and when your units become available.

From April 2018, the gains from ELSS over 1 lac will be subjected to a 10% tax on long term capital gains. Inspite of this, ELSS funds remain the best option to save tax.

You can use Valueresearchonline portal to select the best performing ELSS funds.

Smart Tip:

1. Go for SIP instead of lump sum investments. This reduces the risk and creates a disciplined approach to investing.

2. Invest for the long term. Don’t redeem your units right after the 3 year lock in period. Instead, stay invested and let your money grow.

Also read: How to Invest in Mutual Funds Online in India

2. PPF

Expected returns: 7.6% (Current FY 2018-19)
Tenure: 15 years from the end of the Financial Year in which the account was opened.
Rating: 4 star

Public Provident Fund (PPF) is a time tested tax saving investment option and one of the most popular ones.

It is a safe option and offers moderately good returns. it has a lock in period of 15 years. The interest rate is revised from time to time. Being a fixed return investment, you know exactly how much interest you are going to earn.

However, the interest rate of PPF has declined over the years. Still, it offers one of the best rates among all fixed income investments.

Once you open a PPF account, you will have to invest a minimum of ₹500 in a year.

You can open a PPF account either through a bank or a post office.

Smart Tip:

1. Invest through a bank that allows online investment and access to your PPF account.

2. Invest at the beginning of the financial year to get the full year’s interest.

3. EPF / VPF

Expected returns: 8.55% (Current FY 2018-19)
Tenure: Till retirement. Can be withdrawn if not employed for 2 months or transferred to a new employer when changing jobs.
Rating: 4 star

If you are salaried, you employer must be deducting PF from your salary and depositing it into your EPF account. The deducted amount is 12% of your basic pay, and is free of tax. Your employer matches this amount and contributes to your EPF and pension fund (EPS).

However, did you know you can increase your contribution to PF? You just have to inform your employer to deduct a higher amount from your salary and deposit it into your PF account. This amount will also help you save income tax.

This higher amount is called VPF or Voluntary Provident Fund. It is same in all ways to your EPF, except that your employer does not match this excess contribution.

Smart Tip:

1. Increase your VPF contribution in the year the EPFO increases the interest rate.

4. Sukanya Samridhi Yojana

Expected returns: 8.1% (Current FY 2018-19)
Tenure: 21 years from account opening date or till marriage of the girl after she turns 18.
Rating: 4 star

If you have a daughter below the age of 10, you can open a Sukanya Samridhi Yojana account for her. This will help you save income tax as well as invest for the future of your daughter.

You can open the account as soon as she is born till the time she is 10 years old.

Once you open a Sukanya Samridhi Yojana account, you can invest in it for 15 years.

Only one Sukanya Samridhi Yojana account can be opened for a girl child and both the parents can invest in the same account. Both can claim tax deductions for the amounts they have invested.

Also, you can open the SSY account for a maximum of 2 daughters.

All proceeds from this account will go to your daughter once the account matures.

You must invest a minimum of ₹1000 in a year in the Sukanya Samridhi account.

You can open a Sukanya Samridhi Yojana account in a nationalized bank or a post office.

Smart Tip:

1. Invest through a bank to get easier access to your SSY account.

2. Invest as soon as your daughter is born.

5. Senior Citizen savings scheme

Expected returns: 8.3% (Current Quarter Apr – Jun 2018)
Tenure: 5 years, extendible by another 3 years.
Rating: 4 star

Senior Citizen savings scheme can only be opened by those above 60 years of age.

This is a very good option for retired persons who wants to save taxes. It offers higher returns than a FD and is safe. A maximum of ₹15 lacs can be invested in this scheme.

The interest is paid quarterly, so it is also a source of income for senior citizens.

The tenure of the scheme is 5 years and it can be extended by another 3 years. Only one such extension is allowed.

The interest earned is fully taxable. However, for retirees with few other sources of active income, this should not be a problem since the total interest in a year would not exceed the overall taxable limit for senior citizens (3 lacs for those above 60 years and 5 lacs for those above 80 years).

At current interest rates, the maximum interest that you can earn in a year is ₹124500 if you invest ₹15 lacs.

You can open a SCSS account in a bank or a post office.

6. NSC

Expected returns: 7.6% (Current FY 2018-19)
Tenure: 5 years
Rating: 3 star

The National Savings Certificate is a government backed scheme that is available at any post office. It is a safe investment and helps to save income tax.

The maturity period is 5 years and the returns are moderately good.

The yearly accrued interest is taxable, but is deemed to be invested and is eligible for tax exemption in subsequent years, subject to the maximum limit of 1.5 lacs under 80C.

For example,

If you invest ₹10000 in a NSC in April 2018, you will get tax deduction on that amount for the first year.

The interest at the end the first year will be ₹760, which is taxable, but is considered to have been reinvested for the next year. So you will be eligible for a tax deduction of ₹760 for the next year.

This will continue till the 5th year. On maturity, the interest earned for the 5th year will be taxable in your hands.

Smart Tip:

1. Invest in NSC if you fall in the lowest tax slab (no tax), so that you don’t have to pay tax on the interest.

2. During initial years, invest frequently and create a chain of NSC so that once they start to mature, you have a stream of income. You can also reinvest these amounts to create a large corpus later.

7. NPS

Expected returns: ~9.5% (last 3 years returns for equity based portfolio)
Tenure: Till 60 years of age. Upto 3 partial withdrawals allowed for specific expenses.
Rating: 3 star

The NPS can help you save tax under 3 different sections.

You can claim deduction under section 80C, where the overall limit is ₹1.5 lacs.

There is an additional deduction of upto ₹50000 under section 80CCD(1B). So, if you have used up your 80C limit with other investments, you can claim your NPS contribution under this section.

If your employer also contributes to your NPS upto 10% of your basic salary, this will also not be taxable under section 80CCD2.

However, the NPS is a little complex to understand and there are a few drawbacks of investing in NPS.

The lock period is very long as you can only withdraw when you are 60 years old. This is not a bad thing, considering that you are investing for your retirement.

Upon maturity, you have to invest 40% of your corpus in annuities. You can withdraw the remaining 60% of your corpus. Out of this 60%, only 40% is tax free and 20% is fully taxable.

You will receive regular pension from the amount you invest in annuities. The pension amount is also fully taxable.

Hence, the investment amount in NPS is very tax friendly, however, the withdrawal provisions are not very favourable.

Smart Tip:

1. Since you are investing for the long term, invest the maximum allowable limit into equities.

8. ULIP

Expected returns: ~9% (last 3 years returns for best performing ULIPs)
Tenure: variable, usually 10-20 years.
Rating: 2 star

ULIPs are insurance cum investment policies which invest in equity and debt mutual funds to earn a higher return than traditional insurance policies.

The premium paid for ULIPs are not taxable.

In the past, ULIPs have been notorious for their high charges and rampant mis-selling by insurance agents. More recently, the charges of ULIPs have been capped by IRDA and are not as high as they used to be.

Inspite of this, the charges are comparatively higher than other investment options. The insurance cover provided is also not adequate.

Also, it is not advisable to mix insurance and investments, since in such options, neither objective is fully satisfied.

The only positive point of ULIPs is that being an insurance policy, the returns are not taxable; while returns from mutual funds attract capital gains tax subject so some conditions.

9. Bank FD

Expected returns: 6-8% (current rates for FY 2018-19)
Tenure: 5 years
Rating: 2 star

You can save tax by investing in 5 year bank FDs.

The returns are moderate and the interest earned is taxable, so the overall gain is quite low.

10. Post office time deposit

Expected returns: 7.4% (current rates for FY 2018-19)
Tenure: 5 years
Rating: 2 star

Post office time deposits are similar to bank FDs. 5 years TDs can help you save tax.

Like FDs, the returns are moderate and the interest earned is taxable. Hence, the overall gain is quite low.

11. Pension plans

Expected returns: 6-9%
Tenure: variable, usually 20 years. Depends on vesting age.
Rating: 2 star

Most insurance companies offer pension plans which help to save tax under section 80CCC, which is part of the overall 80C limit.

There are various types of pension plans, and ones with insurance cover also.

On maturity, 33% of the corpus can be withdrawn and is tax free. The remaining 67% is converted into annuities and you will get regular pension, which is taxable.

12. Traditional Insurance plans

Expected returns: 4-6%
Tenure: variable, usually 20 years
Rating: 1 star

Traditional Insurance plans are the ones which provide a small amount of insurance cover and a little bit of returns on your invested money.

These are the plans which have a 10-20 lacs insurance cover for which you pay a premium of around ₹50000 per year. The premium amount is not taxable and helps you save income tax.

At the end of the tenure, which is usually 20 years, you get back around double of what you had invested.

Do you know how much the rate of return works out to? A measly 5-6% is all you get for investing for 20 years! The insurance cover provided is also not adequate.

Its best to stay away from such plans.

13. Term insurance

Expected returns: NA
Tenure: variable, usually 20-30 years
Rating: 5 star

A term insurance is a pure protection cover. The insurance cover is high and the premium is low.

The premium amount is eligible for tax deduction.

A term insurance is a “Must have” component in any financial plan.

Smart Tip:

1. Buy  a term insurance plan for 30 years when you are young. That way you will have to pay a lower annual premium.

14. Children education fees

School fees paid for your children’s education are tax free for a maximum of two children. Only the tuition fees are eligible for the deduction, any other fees levied by the school are not eligible.

How to Save Tax on Salary

save income tax15. House rent allowance

If you are salaried, and your employer provides HRA, you can save a lot of tax.

The amount of tax saved under HRA is determined by the conditions mentioned below.

(i) 50% of your basic pay if you live in a metro; or 40% of your basic pay for rest of India.
(ii) Actual HRA received.
(iii) Actual rent paid minus 10% of your basic pay.

The lowest of the 3 amounts is eligible for tax exemption.

For example,

Let’s say you live in Delhi and pay a rent of ₹20000 per month.

Your basic pay is ₹50000 per month and your employer gives you an HRA amount of 60% of basic, that is ₹30000 per month.

According to the conditions, your HRA will calculated as follows:

(i) 50% of basic pay = ₹25000
(ii) Actual HRA received = ₹30000
(iii) Actual rent paid minus 10% of basic pay = ₹20000 – ₹5000 = ₹15000

The lowest of the 3 amounts is ₹15000, so you will get HRA exemption of this amount. The yearly amount comes to ₹180000.

The criteria for claiming HRA is that you should be living in a rented house.

The good news is that you can even pay rent to your parents and claim HRA exemption if you live in a house owned by them.

16. Leave Travel allowance

You can claim tax breaks for your travels twice in a block of four years, if your employer provides you LTA.

The exemption is available for travel of an employee with family, ie, spouse, children and dependent parents. The travel should be within India.

Air, Rail or bus fares by the shortest route from the source to destination is allowed for the exemption.

17. Children Education Allowance

You can get a tax free allowance of ₹100 per month for your child’s education if your employer provides this allowance. This allowance can be availed for a maximum of 2 children.

Thus, you can save tax on a maximum of ₹2400 per year if you receive this allowance.

The education expenses should be in incurred India to be eligible for this allowance.

18. Hostel Expenditure Allowance

You can get a tax free allowance of ₹300 per month for your child’s hostel expenses if your employer provides this allowance. This allowance can be availed for a maximum of 2 children.

Thus, you can save tax on a maximum of ₹7200 per year if you receive this allowance.

The hostel expenses should be in incurred India to be eligible for this allowance.

19. Telephone and Internet Expenses

If your employer reimburses your telephone or internet expenses they are tax free.

However, even if they do not reimburse these expenses, they might have a policy to make it tax free.

It will be part of your CTC and only paid to you upon submission of bills. This amount will be tax free. Any leftover amount at the end of the year that you have not claimed will be paid to you as taxable allowance.

20. Food Coupons or Food Cards

Many employers provide food coupons like Sodexho, Ticket Restaurant, or Food cards like HDFC Food Plus card. This amount is not taxable.

A maximum of ₹50 per meal during working hours is exempt from tax. So if your employer provides ₹100 per day for 2 meals, you will save tax on ₹2600 per month (100 * 26 days).

This amount can be increased or decreased by your employer based on the working hours and as per their discretion.

21. Daily Allowance for Official Travel

For work-related travel to a location other than your usual place of work, any daily allowance you receive for meeting your expenditures is tax free.

The exemption is eligible upto the actual amount of expenses incurred.

22. Company Leased Car

When you drive a company leased car, you can save tax on the car EMI, fuel and driver expenses. This exemption is subject to certain conditions.

Ask your employer if they have a car lease policy.

23. Leave Encashment upon Retirement

Unused earned leaves can be encashed upon retirement and they are tax free upto a certain extent.

For government employees, the amount is fully exempt, while for other, a maximum of ₹300000 is exempt, subject to conditions.

24. Provident Fund withdrawals

Money from the provident fund (EPF) is fully tax free if withdrawn after 5 years of continuous service.

The 5 years can be served in a single organization or in multiple organizations, provided the PF has been transferred to the current employer from the previous ones.

25. Gratuity payments

Gratuity payments received upon retirement is free from tax upto a certain extent.

For government employees, the amount is fully exempt, while for other, a maximum of ₹2000000 is exempt, subject to conditions.

26. VRS payments

Money received under VRS is tax free upto a maximum of ₹500000 subject to certain conditions.

27. Retrenchment compensation

In the unfortunate event of a job loss due to cost cutting in the company, any retrenchment compensation received is tax free upto a maximum of ₹500000 subject to certain conditions.

How to Save Tax Other than 80C

28. Medical Insurance and Preventive Health checkup

Section 80D

Medical insurance premium is eligible for tax deduction for an amount of ₹25000 for self, spouse and dependent children. For senior citizens, the deduction is ₹30000.

You can claim an additional deduction of ₹25000 for medical insurance premium of parents. If your parents are senior citizens, then the deduction is raised to ₹30000.

Out of the overall limit of ₹25000 (₹30000 for senior citizens), you can use upto ₹5000 for preventive health checkups.

29. Home Loan

Want to take a home loan for buying your dream home? Well, there’s some good news for you. A home loan can help you save tax in 3 different ways:

(i) The interest paid on a home loan is tax free upto ₹2 lacs per year under Section 24.
(ii) The principal repaid is eligible for tax deduction under 80C, subject to the overall limit of ₹1.5 lacs.
(iii) If you are a first time home buyer, you can claim an additional deduction of ₹50000 under Section 80EE.

30. Education Loan

Section 80E

The interest paid on education loan is free of tax without any upper limit. The loan should have been taken for higher education for self, spouse or children. The higher education can be either in India or abroad.

The deduction can be taken upto 8 years from the time you start repayment of the loan.

31. Deduction for House Rent paid

Section 80GG

If you are self employed, or do not receive HRA as part of your salary, you can still claim deductions for rent paid.

This deduction is claimed under Section 80GG and you need to fill Form 10BA with details of rent paid. You should be living in a rented accommodation to avail of this deduction.

The lowest of the following three conditions will be the amount of deduction:

(i) ₹5000 per month
(ii) 25% of total income
(iii) Actual rent paid minus 10% of total income

Here, total income excludes certain components like capital gains and other deductions.

32. Medical expenses for Permanent Physical Disability

Section 80U

Individuals who are physically disabled can claim tax deduction for medical treatment of the disability.

If the severity of the disability is less than 80%, deduction can be availed upto ₹75000

If the severity of the disability is more than 80%, deduction can be availed upto ₹125000

33. Medical expenses for Physically Disabled Dependents

Section 80DD

In case you have any dependents who suffer from any disability, you can avail tax deduction for their treatment.

If the severity of the disability is less than 80%, deduction can be availed upto ₹75000

If the severity of the disability is more than 80%, deduction can be availed upto ₹125000

34. Medical expenses for Treatment of Specified Diseases

Section 80DDB

Medical treatment of certain specified diseases like AIDS and cancer are eligible for tax deductions.

This deduction can be claimed for treatment of self or dependents.
The maximum available deduction is ₹40000. For senior citizens it is ₹100000.

35. Donations to Charitable Institutions

Section 80G

Donations made to certain charitable institutions and trusts are exempt from tax. The donation must be made in cheque or cash. For cash donations, the maximum deduction that can be claimed is ₹2000.

The amount you donate may be fully or partially deductible, with or without upper limit depending on the institution you are donating to.

36. Donations for Scientific Research & Rural Development

Section 80GGA

Donations made for scientific research & rural development are eligible for 100% tax exemption.

37. Donations to Political Parties.

Section 80GGC

Donations made to political parties are eligible for 100% tax exemption subject to certain conditions.

The donation should be made in any for other than cash. Cash donations are not eligible for this deduction.

38. Interest on Deposits in Savings Account

Section 80TTA & 80TTB

Interest earned on deposits in savings account is exempt upto ₹10000 under section 80TTA.

For senior citizens, this amount is ₹50000 under section 80TTB.

11 Types of Income that are not Taxable

save tax - tax free income39. Money received from a HUF by its members

Members of a HUF do not have to pay tax on the money they receive from the income of the HUF.

40. Share of profits from a partnership firm

If you are a partner in a partnership firm, any amount you receive as a share of profit from the firm is not taxable.

41. LTCG from Equity Shares and Equity Mutual Funds

Gains made from selling equity shares or equity mutual funds after at least one year of holding is known as long term capital gains (LTCG). Such gains are not taxable upto a maximum of ₹1 lac per year.

For example,

You invest ₹10 lacs today in equity shares or equity mutual funds. After one year, you sell your shares or MF units for ₹11.5 lacs. That means you have made a LTGC of ₹1.5 lacs. Out of this, ₹1 lac is tax free. You have to pay a LTGC tax of 10% on the remaining ₹50000.

42. Scholarship or Awards for Education

Any scholarship or award received by anyone for education is not taxable.

43. Dividends from Shares and MFs

Dividends received from shares of domestic companies and mutual funds (both equity and debt) are tax free upto a maximum of ₹10 lacs.

44. Agricultural income

Any agricultural income is free of tax. Agricultural income consists of the following:

(i) Rent of agricultural land
(ii) Sale of agricultural produce
(iii) Rent of farm buildings

45. Interest Income on NRE Account

For NRIs, any interest income earned on deposits in their NRE account is free of tax.

46. Reverse Mortgage

Reverse mortgage is a scheme in which senior citizens (those above 60 years) with a residential property in their name can earn a regular income from a bank. Although sometime called a reverse mortgage loan, it is different from a loan since you don’t have to pay anything back to the bank.

The residential property is pledged to the bank and the bank pays you reverse EMIs. At the end of the tenure, the property is transferred to the bank, however, you can continue to live in it.

Reverse mortgage payments are not subject to tax.

This is a very good option for senior citizens whose children are settled in a foreign country and are unlikely to return to India.

47. Monetary Gift from Relatives

You don’t have to pay tax on any money you receive from your relatives. Here, relatives are defined as per income tax rules and only money from those relatives are eligible for this exemption.

48. Money Received as Gift on Marriage

Are you are planning to get married? There’s some good news for you. Any money you receive as gift for your marriage is not subject to tax.

So let’s hope your invitees give you lots of cash gift 😉

49. Money Received under Will or Inheritance

Anything you receive as inheritance or through a will is not subject to tax.

Tax Saving for Startups and Business People

50. Rent paid for Office Premises

Startups and business people can save tax on the rent they pay for their office premises.

51. Salary paid to Family Member

Salary paid to employees by a business qualifies as a business expense and is not subject to tax.

Small businesses and startups need manpower but might not have enough money to pay salaries.

They can get around this by hiring family members as employees. The money stays in the family and the salary paid is exempt of tax.

52. Expenses on Travel and Hotel

In order to grow their businesses, owners might need to travel a lot. They can show the cost incurred in travel and hotel as business expenses and claim tax deduction on them.

Smart business people can use this to save a lot of tax. Instead of family vacations, make them into board meetings. Weekend getaways become employee engagement programmes, and so on.

53. Utility expenses

Utility expense like electricity, water, telephone, internet for businesses are not subject to tax.

54. Business Expenses and Purchases

Any expense or purchase for business related purposes can save tax for the business.

For eg, a business might require a car for their day to day travels, a new laptop for carrying on their work, etc.

55. Food expenses

Business people might have to meet many people like clients, partners, vendors, contractors, etc. They might incur food related expenses during these interactions.

These expenses qualify as business expenses and are free of tax.

56. Depreciation of Assets

Small business and startups may have assets like laptops, cars, office furniture, electrical fittings, air conditioners, etc.

These assets depreciate in value each year. This depreciation is eligible for tax deduction.

Bonus Tax Saving Tips & Tricks

57. Form a HUF for Other Income

A HUF is treated as a separate entity from an individual for tax purposes. If you earn a salary and have some other income from a side business, you can form a HUF and show the side business income as the income of the HUF.

This way, you will save on a lot of tax since the HUF will also be eligible for tax benefits.

Start Saving Tax NOW

So which of these methods will you use to save tax?

Did you learn of any new way to save tax after reading this guide? Do you know of any other ways to save tax?

Let me know in comments.

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Image  credits:
Scrabble Series Income Tax by Chris Potter | CC BY 2.0 license | Scaled, cropped from original
KZ99_tax_free_450 by Recon Cycles | CC BY 2.0 license | Scaled, cropped, contrast changed

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