Before starting investing, you should have a clear concept about tax-saving and tax-free features associated with different investment instruments and the differences between these features before choosing an instrument.

Tax-saving only Instruments

The tax-saving feature of a scheme helps an investor claim deductions from the taxable income by investing in the scheme, subject to the upper limit of deductions set by the government.

Having a tax-saving feature, however, doesn’t mean that there will be tax exemptions on the interest or returns or gains from the instrument. The interest / return / gain and the maturity value of such an instrument may be tax-free or may not be.

The examples of some tax-saving financial instruments having taxable interest / return / gain are tax-saving fixed deposits (FDs), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Prime Minister Vaya Vandana Yojana (PMVVY), pension schemes of life insurance companies, tax-saving bonds, etc.

Tax-free only Instruments

The tax-free feature of an instrument makes the interest or return on the instrument tax free and the investor needn’t pay any tax on maturity.

It’s not necessary that the tax-free nature of the interest / return / gain and maturity value of an instrument would entail an investor getting tax-saving benefits on the amount invested in the instrument.

There may or may not be any tax-saving benefits on investments made in a tax-free instrument.

Some of the examples of instruments having tax-free maturity, but no tax-saving benefits are tax-free bonds, Sovereign Gold Bonds (SGB) etc.