Investment options to save tax under old income tax regime

Several individual taxpayers in India look for smart investment options to save tax and build their finances. For the financial year 2023-24, one can make these investments till March 2024. The old tax regime offers various tax deductions and exemptions under different sections of the Income Tax Act, 1961. Of these investments, Section 80C is most widely preferred by salaried professionals and one can avail a maximum deduction of up to Rs 1,50,000. Moreover, the principal paid on the home loan EMI for the year qualifies for deduction under Section 80C.

We list some investment options to save tax under the old income tax regime.

Equity Linked Saving Schemes (ELSS)

The ELSS fund or equity-linked savings scheme is a class of mutual funds that qualify for tax deductions under Section 80C of the Income Tax Act, 1961. It is a diversified equity mutual fund with the lowest lock-in period of three years and most investments are done in large-cap funds. It can be an ideal investment option for taxpayers in 2024 to save tax and focus on wealth creation. One avail deduction of up to Rs 1.5 lakh under Section 80C. Moreover, opting for a Systematic Investment Plan (SIP) lets an investor save a fixed amount of as low as Rs 100 to Rs 500 in ELSS. There is no capping on the maximum amount. One must note that the returns are market-linked and depend on the Indian stock market performance.

National Pension System (NPS)

The NPS is a government-sponsored pension scheme that allows salaried and self-employed individuals to make significant savings for retirement and get tax deductions. The contributions made to the NPS qualify for a tax deduction of up to Rs 1.5 lakh under Section 80C. Further, there is an additional tax deduction of 50,000 under Section 80 CCD (1B). For individuals with a corporate NPS account, 10% of their basic salary contributed by the employer towards NPS qualifies for deduction under Section 80CCD (2).

NPS offers two types of accounts: Tier I and Tier II accounts. While Tier I is a mandatory pension account with specific withdrawal restrictions, Tier II is a voluntary savings account with greater flexibility for withdrawals. Only the contributions made by a Central government employee in a Tier 2 account qualify for tax deduction.

Public Provident Fund (PPF)

A Public Provident Fund (PPF) is a safe investment tool compared to other options and comes with long-term benefits, enabling investors to gain stable returns. The PPF is a government-sponsored scheme with multiple tax benefits. Firstly, it offers a deduction under section 80C on the investment made. Secondly, the interest received and the maturity amount are tax-free. There is a mandatory lock-in period of 15 years. PPF account holders have the option to extend the account in blocks of five years after the initial 15-year period. Further, the current interest rate offered in PPF is 7.1%.

Senior Citizens Saving Scheme (SCSS)

The SCSS is a government-sponsored investment scheme and is seen as a safe and reliable option by many taxpayers. The SCSS has been designed for Indian citizens above the age of 60 years, enabling them to receive consistent income post-retirement. The interest rate provided under SCSS is 8.2% per annum, an it is one of the highest paying small savings schemes in India. A maximum of Rs 30 lakh can be deposited in this scheme and tax deduction of up to Rs 1.5 lakh under Section 80C is provided. The investment made under SCSS matures five years after the date of account opening.

National Saving Certificate (NSC)

The National Savings Certificate (NSC) is a fixed-income investment scheme offered by the Government of India to encourage individuals to make small savings. These certificates can be purchased from any post office across India and are available in denominations from Rs 100 to Rs 10,000. The term for investment in this scheme is five years. The current interest rate in NSC is 7.7% per annum, which is compounded annually but payable at maturity. The interest incurred on the NSC is reinvested and becomes eligible for another tax deduction.

Life Insurance policy

Section 80C of the Income Tax Act, 1961, provides tax deductions of up to Rs 1.5 lakh on the premium payment made towards life insurance policies. Insurance policies are typically in the categories of Unit-Linked Insurance Plans (ULIP) and traditional policies. ULIPs are designed as insurance and investment policies since a part of the premium is used to secure life insurance while the remaining amount is invested in equities and debts. These insurance plans have an average return of 8-10% in the past five years and have a lock-in of five years. The maturity is taxable, taken on or after February 2021, if the premium payment made in any year during the policy tenure exceeds Rs 2.5 lakh.

On the other hand, in traditional insurance policies, the investments are made in fixed-income instruments and provide an average return of around 5-7%. These come with high charges and a higher lock-in period if the policy is discontinued. In other policies, except ULIPs, taken on or after April 1, 2023, if the premium payment made in any year during the policy tenure does not exceed Rs 5 lakh, the maturity amount is tax-free.

Sukanya Samriddhi Yojana (SSY)

The Sukanya Samriddhi Yojana (SSY) is a government-backed savings scheme designed as a part of the ‘Beti Bachao, Beti Padhao’ campaign to secure the future of a girl child. The scheme requires a low minimum deposit of Rs 250 and offers an attractive interest rate of 8.2%. The maximum annual deposit limit is Rs 1.5 lakh. Thus, it is suited for most Indian families and ensures financial security. One avail this scheme by approaching any post office and designated branches of authorised commercial banks before the girl child turns 10. The account will be operative for 21 years from the date of its opening.