Five tax saving investment options to get tax free returns

1. Public Provident Fund (PPF)
An individual can save income tax under Section 80C by investing in the Public Provident Fund (PPF). This small saving scheme has the "exempt-exempt-exempt" or EEE status. This means that the individual can claim a deduction on the amount invested and not pay tax on the interest earned as well as the maturity amount.

In terms of safety parameters, the scheme offers the highest safety as it comes with a sovereign guarantee.

The central government revises the PPF's interest rate every three months. For the quarter ending on March 31, 2023, the PPF is offering an interest rate of 7.1% per annum. As mentioned earlier, the interest earned in a PPF account is exempted from tax.

The PPF account comes with a lock-in period of 15 years. The calculation of 15 years lock-in starts from the end of the financial year in which the investment is done. A loan facility is available during the third to sixth financial year of account opening. The premature withdrawal facility is available from the seventh financial year of account opening, subject to certain conditions. A PPF account can be closed prematurely, subject to certain conditions.

A PPF can be opened either with a post office or a bank. An individual can open only one PPF account in their name.
The minimum and maximum investment is Rs 500 and Rs 1.5 lakh, respectively, in a financial year.

2. Sukanya Samriddhi Yojana (SSY)
The Sukanya Samriddhi Yojana (SSY) was introduced under the government's "Beti Bachao, Beti Padhao" scheme. This is a deposit scheme for girl children. It allows the parents to invest in the education or marriage of a girl child and at the same time claim income tax benefit.

Just like PPF, the Sukanya Samriddhi Yojana account also has EEE tax status. Hence, the amount invested, interest earned and the maturity amount are exempted from tax.

The SSY also comes with a sovereign guarantee. Hence, it has the highest safety standard. The government reviews the interest rate of this small savings scheme every quarter. Currently, for the quarter ending March 31, 2023, the scheme offers an interest rate of 7.6%.

The scheme has a lock-in period of 21 years from the date of opening of the account. However, premature withdrawal is allowed subject to certain conditions.

An account under the Sukanya Samriddhi Yojana can be opened by the guardian in the name of the girl child. The age of the girl child should not exceed 10 years. The account can be opened either with a bank or a post office.
The minimum and maximum deposit amount is Rs 250 and Rs 1.5 lakh, respectively, in a financial year. The account will be maintained by the guardian till the girl child attains the age of 18.

3. Employees Provident Fund (EPF) and Voluntary Provident Fund (VPF)
Salaried individuals covered under the Employees Provident Fund (EPF) mandatorily deposit 12% of their salary in the EPF account. The employer also makes a matching contribution. The employee's contribution to the EPF account is eligible for deduction under Section 80C. To make an additional contribution to the EPF account, one can opt for the Voluntary Provident Fund (VPF). The rules for EPF and VPF are the same.

The EPF scheme is managed by the government. Hence, it offers the highest safety.

The government is yet to announce the interest rate on the EPF scheme for 2022-23. For the previous financial year, the interest rate was 8.1%.

The scheme has a lock-in period till the age of retirement. However, the scheme allows premature withdrawals for certain situations such as for higher education, marriage and treatment of illness, among others.

The EPF scheme has EEE tax status subject to certain conditions. From 2021-22, if the employee's contributions to EPF and VPF accounts exceed Rs 2.5 lakh in a financial year, the interest earned on the excess amount will be taxable. Further, from FY 2020-21, if the employer's contributions to EPF, NPS and the superannuation fund on an aggregate basis exceed Rs 7.5 lakh in a financial year, the excess amount will be taxable in the hands of the individual concerned. Any interest, dividend, etc earned on excess contribution will also be taxable. However, the maturity amount remains tax-exempt.

Hence, one can say that as long as the employee's and employer's contribution limits are not breached, the EPF has EEE tax status.

4. ELSS mutual funds
ELSS stands for equity-linked savings scheme. These are the mutual fund schemes that invest in equities and offer tax-saving benefits. An individual can claim tax benefits up to Rs 1.5 lakh under Section 80C.

As these schemes invest in equities, they carry the risk of losing capital. The returns are neither fixed nor assured. The returns are market-linked and dependent on the performance of the equity market.

The ELSS mutual fund scheme comes with a lock-in period of three years. This is the shortest lock-in period among all the tax-saving options available under Section 80C. There is no premature withdrawal in an ELSS.

While investing in this scheme, an individual has to choose between dividend and growth options. Under the dividend option, dividends are paid to the investor when they are announced by the fund house. In the growth option, no dividends are paid; the money remains invested in the scheme till it is redeemed by the investor.

From 2020-21, the government has made dividends taxable in the hands of individuals. Dividends are taxed at the income tax rate applicable to your income. So, if your taxable income is in the highest tax bracket (30%), then your dividends will be taxed at the same rate.

Another thing to keep in mind is the taxation of capital gains at the time of redemption. Till 2017-18, any gains from redeeming the equity mutual were exempted from tax. However, income tax rules were revised on April 1, 2018.

Now, gains from equity shares and equity mutual funds are taxed at 10% without the indexation benefit. However, capital gains will be taxed only if these exceed Rs 1 lakh in a financial year. In other words, as long as capital gains from equity shares and equity mutual funds do not exceed Rs 1 lakh in a financial year, no tax has to be paid.

Hence, one can say that ELSS mutual fund scheme will have EEE tax status if an individual opts for the growth option while investing, and while redeeming, ensuring that the capital gains do not exceed Rs 1 lakh in a financial year.

5. Life insurance policies
To save income tax under Section 80C, an individual can buy life insurance policies. These include term insurance plans, unit-linked insurance plans (ULIPs) and traditional insurance policies. The amount of deduction that can be claimed is the amount of premium paid on all the life insurance policies.

However, there are certain factors one must remember while buying life insurance policies. A term life insurance plan is the cheapest among all life insurance policies. This is because no money is paid at maturity. ULPIs and traditional insurance policies are a combination of protection and investment. So, their premiums are on the higher side.
If you are planning to buy ULIPs and/or traditional life insurance policies, ensure that you do not end up paying taxes at maturity.

ULIPs are market-linked insurance products where investment is done either in equity, debt or in a combination of both. The individual chooses while starting the investment. The investor can switch between various investment funds during the policy term.

Usually, a ULIP comes with a premium paying term of 15 or 20 years and a lock-in of 5 years. Once the lock-in period is completed, the individual can redeem the funds before the completion of the premium paying term. How much the investor will get back depends on the market performance; ULIPs charges are deducted.

Do note that the money will be tax-free if the annual premium of the ULIP investment does not exceed Rs 2.5 lakh in a financial year. According to the notification issued by the Central Board of Direct Taxes (CBDT), ULIPs bought before February 1, 2021, are considered to be tax-exempt provided with the annual premium of the new plans bought on or after February 1, 2021, does not exceed Rs 2.5 lakh.

This means that as long as the annual premium of the old ULIPs (bought before February 1, 2021) and new ones (bought on or after February 1, 2021) does not exceed Rs 2.5 lakh, the tax exemption will continue. However, if the annual premiums exceed Rs 2.5 lakh, then tax will have to be paid.


If you are planning to buy a traditional life insurance policy to save income tax, there are certain things you must consider. The premium on such schemes is based on the age of the individual, the sum assured and the policy term. Here also, the tip qualifies for the income tax benefit, but the maturity value is tax-free, subject to certain conditions.

As announced in Budget 2023, if the premium paid on life insurance policies, except ULIPs, exceeds Rs 5 lakh in a financial year, the proceeds will be taxable. However, the exemption will be available in case of the death of the policyholder. Do note that the new taxation law will come into effect from April 1, 2023, i.e., FY 2023-24. Further, the CBDT is yet to provide the taxation methodology.

So, if you are planning to buy a traditional life insurance policy in 2022-23, ensure that the annual premium does not exceed Rs 5 lakh, to avoid any negative taxation.
Traditional life insurance policies do not offer any liquidity during the policy term. Hence, you may not be able to withdraw the funds in case of an emergency. Further, the returns from a life insurance policy are on the lower side. Usually, such policies offer returns in the range of 5-6% per annum.

The returns from ULIPs and traditional life insurance policies can become tax exempt provided the premium limits are not breached in any financial year.