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How to Choose The Best Suitable Tax Saving Instrument?


If there is a delay in tax planning there are chances of overlooking some avenues which may impact our returns and at times dampen our financial goals.


This tax season give yourself some time and choose the product that suits you and work towards your financial goal. Every tax savings investment should be selected considering your age and risk capacity mainly.

How to choose the best suitable tax saving instruments?

Financial instruments can be considered on the basis of returns, safety, liquidity, flexibility, taxability of income, and cost of investment including your tax slabs.

As it is said, "do not put all your eggs in a single basket." Try to mix your investment in right amount on the right product.

Here are a few tax saving instruments in the country. We have excluded life insurance for the purpose.

How to Choose The Best Suitable Tax Saving Instrument?

1) ULIPs

Those who need insurance, which is to be bundled along with a tax saving instrument, Unit Linked Insurance Plans would be an ideal choice. They offer tax benefits under Sec 80C of the Income Tax Act. Returns are tempered because of the allocation of premium to various charges.



On the other hand, if you are looking at some risk, with the possibility of higher returns, go in for an Equity Linked Saving Scheme (ELSS). Even though they are risky avenues in the long run they can generate good returns.

Unlike any other equity mutual fund schemes, ELSS comes with a lock-in period of three years. They provide you with tax benefit under Section 80C benefits and also the returns earned are tax free.

3) PPF and NSC

The middle age and risk-averse individuals can consider instruments like the Public Provident Fund and the National Savings Certificate (NSC). Investing in such schemes are less risky, though the returns can be moderate at times. However, it is not sure that returns will beat the inflation. At the moment, NSC and PPF offer you interest rates of 8.70 per cent per annum. Since they are backed by the government, they are exceedingly safe investment instruments. They are the best suitable tax saving instrument.

Returns from various tax saving instruments in India

NameInterest Rate/Returns
PPF 8.7%
NSC 8.5%
ELSSDepends on market conditions
New Pension SchemeDepends on market conditions
Bank Tax Saving Fixed Deposits7.5-8.5%
ULIPSDepends on market conditions

4. New Pension Scheme

New Pension Scheme or NPS can be one of the options if the person has not planned for his retirement. This scheme invests in equity as well as debt funds. An investor can choose from the three options from the scheme.

Individuals who are about to retire can consider investing in the Senior Citizen Savings Scheme and pension plans from insurance companies.

Tax Saving Fixed DepositsTax Saving Fixed Deposits

Tax savings bank fixed deposit is an all time favorite for many. The biggest drawback of this instrument is that the interest received would be subject to tax. This is very unlike the PPF and the ULIP, whose income is completely exempt from income tax.

One can invest some amount but one needs to keep in mind that TDS will be applicable as per the returns and investments.


There is nothing called the best suitable tax saving instrument. It all depends on your age and the ability to take risk. If you are able to take greater risk, you can ideally go for instruments like ELSS and ULIP.

The lock-in period for ELSS of three years is the lowest among all the tax saving instruments in the country.

Note that aggregate deduction that one can claim for tax savings instrument is fixed at Rs 1.5 lakh for this particular year. Documents which are needed to claim deductions should be safely stored for future use.

Read more about: income tax elss ulips
Story first published: Wednesday, January 6, 2016, 10:53 [IST]
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