Best tax free investment options

Best tax free investment

What is tax free investment?

Tax free investment means such investment on which the return or interest is completely free from income tax.
That is, whatever money you get from this investment, you will not have to pay any kind of tax on it.

Best Tax Free Investment Options

1. Public Provident Fund (PPF)

What is PPF?

PPF is a long-term savings scheme run by the Government of India, which is one of the most popular options for saving tax and giving tax free returns.

Features of PPF:

• Tax exemption on investment under 80C
• Interest received and maturity amount are completely tax free
• Interest rate is around 7.1% (decided by the government every quarter)
• Lock-in for 15 years , followed by extensions of 5 years each
• Very safe investment as it is a government-backed scheme

2. Sukanya Samriddhi Yojana (SSY)

What is SSY?

If your daughter is younger than 10 years, then this scheme is best for giving tax free returns . This scheme has been started for the bright future of daughters.

Features of SSY:

• Tax exemption on investment under 80C
• Interest received and maturity amount are completely tax free
• Interest rate is around 8% (decided by the government from time to time)
• Funds will be available when daughter turns 21
• Excellent option for big expenses like education, marriage

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3. Employee Provident Fund (EPF)

What is EPF?

If you are employed, EPF is deducted from your salary every month. This is a great tax free investment.

Features of EPF:

• Your contribution is tax-exempt under 80C
• Interest earned and final amount is completely tax-free (subject to certain conditions)
• Current interest rate – around 8.15%
• Secure fund for retirement

4. Kisan Vikas Patra (KVP)

What is KVP?

This is a post office scheme in which your money doubles in a fixed time.
However, the interest received on this is taxable , but if you combine it with tax-exempt investments like PPF or EPF, you can create a better balance.

5. Government Bonds and Tax-Free Bonds

What are Tax-Free Bonds?

The Government of India or government organizations like NHAI, PFC, REC issue tax free bonds from time to time. The interest received on these is completely tax free .

Features of Tax-Free Bonds:

• Long term investment (10-20 years)
• Interest rate between 6-7%
• Government guarantee – no risk • No tax
on interest

6. Life Insurance Maturity

Tax exemption on life insurance:

If the sum assured and premium ratio of your life insurance policy is correct, the money received on maturity is completely tax free (under section 10(10D)).

Which policy to choose?

• Term Insurance – Affordable and direct protection cover
• Endowment Plan – Both protection and savings
• ULIP – Combo of investment and insurance

7. Municipal Bonds

What are Municipal Bonds?

These are issued by local bodies with the aim of raising funds for the development of cities and villages.
The interest on these can be completely tax free , if the government declares so.

8. Equity Linked Savings Scheme (ELSS) - Limited tax benefits

What is ELSS?

Although the returns from ELSS are not completely tax free, if the long term capital gain is less than Rs 1 lakh, it will be tax free .

Features of ELSS:

• Deduction up to Rs 1.5 lakh under 80C
• Lock-in period of 3 years • Tax free
up to Rs 1 lakh on long term gains

What to keep in mind while choosing tax free investments?

• Look at your goal period – short term or long term
• Risk profile – Do you want a safe option or take a risk to get higher returns?
• Liquidity – Easy access to money when needed
• Return comparison – Inflation-beating returns are a must

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Conclusion

Tax free investment gives you double benefit –
• On one hand your money is safe
• On the other hand you do not have to pay any tax on the returns

If you want low risk and tax free returns, then options like PPF, EPF, SSY, Tax-Free Bonds are good.
If you want a little higher return and have to do tax planning, then you can also include ELSS in your portfolio.

Invest your money wisely, so that you are free from tax tension and your future is also secure.

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