5 investments offering tax free interest income in India

Tax planning is vital since it not only assists you in minimising your tax liability, but also in optimising your investment returns and managing liquidity. Numerous tax-saving products are available on the market. Not every instrument, however, is suitable for everyone. While the primary reason for investing in such instruments is to reduce taxes, taxpayers should keep in mind that such instruments should be chosen based on their financial objectives, age, and risk tolerance, among other factors.

A tax-saving programme that is appropriate for a young assessee may not be appropriate for a retiree because to differences in age, risk tolerance, and financial goals. Assessees frequently confront the quandary of which tax-saving product to pick and why.

Five tax-free investments include the following:

Tax-Exempt Bonds: Certain government-owned entities may raise funds using tax-exempt bonds. HUDCO, REC, PFC, and Indian Railways Finance Corporation are a few of these institutions. In India, interest generated on these bonds is totally tax-free. At the moment, these bonds are traded on stock exchanges. For example, the 8.65% IRFC tax-free bond pays an interest rate of 8.65 percent. However, you must purchase the same at a cost of Rs 1,290, which reduces the yields. Another disadvantage of these bonds is their lack of liquidity.

Public Provident Fund: Interest earned on a Public Provident Fund (PPF) is tax-exempt. Additionally, the PPF is tax deductible under Section 80C of the Income Tax Act. The interest rate on the PPF is significantly higher than the interest rate on FDs offered by practically all large nationalised banks in the country. At the moment, the PPF pays an annual interest rate of 7.10 percent. However, before investing in PPF, keep in mind that it is a long-term investment vehicle with a 15-year lock-in period. It may be a smart tax-saving investment option for an individual wishing to create a corpus at a later stage.

Voluntary Provident Fund (VPF): A VPF is a voluntary payment made in addition to the required EPF contribution. VPF is only available to salaried employees who are EPFO members. Regardless of the employee’s contribution to the VPF, the employer will not contribute more than 12% of the employee’s basic income. The current interest rate on the VPF is 8.50 percent. Contributions to the VPF are deductible under Section 80C. As with EPF, VPF is EEE (exempt-exempt-exempt), which means that the amount invested up to Rs 2.5 lakh in a calendar year, the interest received, and the maturity earnings are all tax exempt.

Interest on savings bank accounts up to Rs 10,000: Interest earned on savings bank accounts is tax-free if the total interest earned during the year is less than Rs 10,000 across all savings bank accounts held by a person. As a result, investors can prepare appropriately. Bear in mind, however, that one significant disadvantage of this investment strategy is the extremely low interest rates. One must deposit the funds in one of the small finance banks, which offer 6% percent on savings accounts with balances exceeding Rs 10 lakhs. It does not, however, provide inflation-beating returns.

Unit Linked Insurance Plans (ULIPs): ULIPs are another type of investment that provides investors with tax-free income. Additionally, these policies give insurance worth ten times the money paid. ULIPs have grown in popularity in recent years. Investors will benefit from up to Rs 1.5 lakh in tax deductions under section 80C of the income tax rules. However, the returns are not very high due to the significant amount of money spent on administrative, mortality, and other costs. Additionally, there is a five-year lock-in term, which may be extended in some situations.

It’s worth noting that if you’re searching for a tax-saving product that provides guaranteed returns with a short lock-in period, you might investigate the benefits offered by National Savings Certificates (NSC). NSCs have a five-year lock-in period. By investing in NSC, you can claim a tax credit under Section 80C of the Income Tax Act. The government adjusts the interest rate on NSC on a quarterly basis. Currently, the interest rate on NSC is 7.9 percent, while the interest rate on tax-saving FDs is in the range of 6.7 percent to 7% p.a. TDS are not applicable to investments in NSC.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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