Tax saving instruments

What Are Tax Saving Instruments?

These tools allow individuals to claim deductions—primarily under Section 80C—up to ₹1.5 lakh annually. Common instruments include:

• Equity Linked Savings Scheme (ELSS): Mutual funds with a 3-year lock-in and equity market exposure

• Public Provident Fund (PPF): Government-backed fixed income scheme with a 15-year maturity

• National Pension System (NPS): A retirement-focused plan with additional tax benefits under Section 80CCD(1B)

• Tax-Saving Fixed Deposits: Fixed returns with a 5-year lock-in

• Life Insurance Premiums: Qualifies for deduction if the policy meets certain conditions

Example

If you invest ₹1.5 lakh in ELSS, you can claim that amount as a deduction under Section 80C. This could reduce your tax liability by up to ₹46,800 if you fall under the 31.2 percent tax bracket, while also giving you potential equity market returns over time.

Key Features to Consider

• Deduction Limit: Most instruments qualify for tax benefits up to ₹1.5 lakh per year

• Lock-in Period: ELSS requires a minimum of 3 years, while PPF is locked for 15 years

• Returns: Fixed (like 7.1 percent in PPF) or market-linked (like in ELSS or NPS)

Benefits of Tax Saving Instruments

• Tax Efficiency: Reduces your taxable income, directly lowering your tax bill

• Financial Discipline: Encourages regular savings and long-term investment planning

• Diversification: Offers a mix of risk levels, from guaranteed returns to market-driven growth

Challenges and Considerations

• New Tax Regime Impact: Under the simplified tax regime, most deductions including those under Section 80C are not available, which affects the incentive to use these instruments

• Inflation Risk: Fixed return options like PPF may not always outpace inflation, especially over long periods

• Liquidity Constraints: Lock-in periods mean that funds are not easily accessible in the short term

Conclusion

Tax-saving tools are key for boosting income, planning future goals, and building financial strength. By 2025, choosing between the old and new tax regimes will be crucial. You should consider not only the tax advantages but also how each option fits your overall financial goals.