There are several ways through which an investor can reduce their income tax liability and save money. Investors can consider instruments that are eligible for deductions under Section 80C and 80D

Considering the financial hardship caused due to lockdown and job losses, pay cuts amind the pandemic the government had extended the deadline for tax savings to June 30, 2020, for FY2019-20 from the earlier deadline of March 31, 2020. However, just a few weeks are left to the extension granted. If you are someone who has still not invested in any tax-saving instrument, it is essential for you to invest by June 30.

One of the most important things that one should remember before choosing any tax-saving instrument is that their investments must align with the objective of tax savings and financial goals. There are several ways through which an investor can reduce their income tax liability and save money. Investors can consider instruments that are eligible for deductions under Section 80C and Section 80D of the Income Tax Act.

Here are some good tax-saving investment options for you:

1. Public Provident Fund: PPF offers an EEE (Exempt-Exempt-Exempt) tax status which means the contribution, interest earned and matury amount are all tax-exempt. Investors who are risk-averse and can not stomach the volatility of equity markets can go for PPF which provides guaranteed, tax-free return at 7.1% interest. The interest rate on PPF is decided by the government every quarter and usually, it remains higher compared to other fixed investment instruments.

2. Tax-Saving Fixed Deposits (FDs): Tax saver FDs are a special category of fixed deposit. These FDs allow investors to claim deductions under Section 80C of the Income Tax Act. Any investor can claim a deduction of a maximum of Rs 1.5 lakh by investing in tax saving fixed deposits. These tax-saving FDs have a minimum lock-in period of five years. They carry a fixed rate of interest currently between 6.5% to 7.5 per cent. The interest earned on such FDs is taxable.

3. National Saving Certificates: NSC is a fixed income investment scheme that investors can open with any post office.  It is one of the most popular small savings schemes in India as it provides higher guaranteed-interest rate compared to most fixed deposits and also offers tax benefits under Section 80C of the Income Tax Act. The interest rate on NSC is decided by the government every quarter. Once done the interest rate remains fixed for the entire tenure. Currently, it offers an interest rate of 6.8 per cent, which is compounded annually but is payable at maturity.

4. ELSS: Other tax-saving options include market-linked instruments like ELSS which have a history to give higher returns in the long run. ELSS funds primarily invest in stocks of listed companies in a specific proportion according to the investment objective of the fund. The funds are diversified equity funds and stocks are chosen from across market capitalisation (Large Caps, Mid Caps, Small Caps) and industry sectors. It is a tax-saving mutual fund which comes with a statutory lock-in period of three years. It offers tax deductions under the provisions of Section 80C. Investment in tax saving mutual funds can give deductions up to Rs 1.5 lakh in a fiscal year. It is a good option for those who have a risk-tolerance and have a long-term financial goal.

5. ULIPs: Ulips are long term investments and the investor is required to invest a fixed amount in it every year for the entire tenor of the plan. If you want to invest in Ulips for a particular goal then the goal should be at least 10 years away. Ulips typically come with a lock-in of five years. Most of the insurance companies now provide online Ulips, in which charges are less hence they are a good option for long term investment. 

6. National Pension System: An NPS Tier I account can be opened online for tax saving under Section 80C. In NPS, a government employee contributes towards pension from monthly salary along with matching contribution from the employer. The biggest advantage of NPS is diversification. NPS has 3 funds in store for the subscribers. These include corporate funds, equities, government securities. Moreover, the investment is handled by professional fund managers to ensure that you get the optimum return on your investment. If one has already exhausted the Rs 1.5 lakh ceiling under Section 80C, one can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1B)

7. Insurance: Health insurance acts as a tax saving avenue by providing tax exemption under Section 80D of the Income Tax Act. Any individual who pays the annual health insurance premium for self, spouse or dependent children can claim benefit of up to Rs 25,000 under section 80D of the Income Tax Act. If the individual is a senior citizen, and a resident of India, then the exemption limit is up to Rs 50,000. In case both the taxpayer and the parent, for whom the medical covers have been taken, are aged more than 60 years, the maximum deduction that can be availed is Rs 1 lakh.

Deduction of up to Rs 25,000 or Rs 50,000 if insurance is for you or spouse above 60 years, can be claimed. If you insure your parents, you get an additional deduction of Rs 25,000 or Rs 50,000 if they are above 60. For a life insurance policy, tax deduction of up to Rs 1.5 lakh per annum is allowed.