Best Tax Free investments in India

Best Tax Free Investments in IndiaBest Tax Free investments in India

Investors keep worrying that they need to pay tax on the returns they are getting from various investment options. We have analyzed the investment options which are tax free in India and provided a comprehensive list along with comparison chart.

What are Tax Free investments?

Tax free investments are those where the returns or income from such investment options are not taxable. If you consider Bank Fixed deposits, thought it looks as if we are getting 9% interest per annum, if you are in higher tax bracket, the returns would get lowered. Often investors feel that if we would have invested in tax free investment options, we would have saved tax on returns.

Best Tax free investments in India

1) Tax Free Bonds: Tax free bonds are issued every year by various companies backed up by Government security. The tax free bonds are generally issued by companies during financial year end.

The rate of interest in the last few years is around 7% to 8% per annum. Recent tax free bonds issued in Jan/Feb/Mar-2013 had interest rates around 7.5% to 8% per annum.

You can earn more returns provided you buy from the issuer directly. These tax free bonds are listed in stock exchanges and you can buy or sell anytime. However these are available at discounted price in stock exchanges. Means you will earn less interest if you are buying from the stock exchanges.

These are low risk investments as they are backed up by the Government of India. These are best suitable for investors who are in higher tax bracket as the returns on these tax free bonds are not taxable.

You may like: Best ELSS Mutual funds to invest for tax savings

2) Debt Mutual funds (Dividend option) and MIP’s – Dividends from debt mutual funds or monthly income plans (MIP's) are tax free. Please note that Mutual Fund Company need to pay dividend distribution tax before paying such dividends to investors.

Debt mutual funds (Dividend option) / MIP’s provide regular income to investors. If you observe, the post-tax returns from Bank FD’s would be low. The returns from these mutual fund schemes are generally higher than the bank fixed deposits. These are best suitable for investors who are with low risk appetite and looking for regular income through dividends.

3) Equity and balanced mutual funds: Dividends and long term capital gains from equity mutual funds and balanced mutual funds returns are tax free. This is one of the best tax free investment options if you invest for long term. The returns for equity mutual funds range 8% to 15% per annum. On the other hand, balanced mutual funds provide an opportunity for investors who look for moderate risk to low risk as they invest majority in debt related instruments and smaller portion in equity.

5) Investments in Stock for long term: Investment in stocks for long term provides decent returns. The dividends and long term capital gains from stocks are tax free. Stock market has given average returns of 15% per annum in the last 10 to 12 years; hence this is one of the best tax free investments if you are looking for long term. However, investments in direct stock market are high risk. Investing in blue chip companies, would lower your risk and provide you good dividend and capital appreciation which would be tax free.

6) Public Provident Fund: While Investments in PPF provide tax benefits under section 80C, the returns are tax free. Currently the interest rates are 8.5% per annum and it would be revised by Government of India every year. Since the PPF account needs to be opened for 15 years and you can invest Rs 1 lakh every year, you would get decent tax free returns at maturity. People looking for long term low risk investment option along with income tax benefits can invest in this tax free investment option.  

Also read: Mahindra FD – 12% interest – Should we invest?

7) Life insurance proceeds at maturity: I am not mixing up insurance and investments. What I am talking about so-called “insurance-cum-investment” products offered by insurance companies. Either it could be an endowment policies (Returns on maturity) or money back policies (returns at specific intervals), the maturity proceeds are tax free. If an investor looking for insurance and want to add an option of investment in it, he can buy such insurance policies. However the returns on such policies are very low and generally range around 5% to 6.5% per annum.  Also note that proceeds from any other life insurance like term insurance policy are also tax free. Since those are not investments, I am not calling them as tax free investments.

Comparison chart of all Tax free investments in India

Comparision of Best Tax Free Investments in India

Conclusion: Tax free investments in India provide good opportunity for investors who are in higher tax bracket and want tax free returns. In my opinion, every investor needs to allocate some amount every year towards tax free investment options.

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Best Tax Free investments in India


  • Reddy priya

    Hello Suresh,

    I read your articles it is very good and informative. I need your help on tax saving. I am earning 6LPA in hand 5.3LPA. So i am planning to invest in the below tax saving options:

    1. NSC 5yrs – As per my knowledge bond will be valid for that particular financial year tax claim. Form 2nd year is there any option for tax benefit? and how?

    2. LIC – Premium of 20000PA i planned to invest.

    3. PPF – 10000/rs every year can i claim tax? plz provide info.

    4. EPF – 12% for now. planning to opt for 16% can i change it later in the same financial year or next year only?

    Please suggest me the best tax saving options if any? If above taken options are good or not also you can suggest?

    reddy priya

  • Goyal

    Sir, i want to invest an amount of around 10 lacs, which liquidable short term investment plan would you advice me?

  • kiritbhai parikh

    Dear Sir.

    Good morning. I have a family fund around 2 crores rupees. I would very much appreciate to receive 

    your most valuable guideline and advise regading the several propositions and suggestion.

    Warm greetings.


    • Hi Kiritbhai, Please see these options for lump sum invesmtnet so that you get maximum returns.

  • Vikas

    Hi Suresh Sir,
    I’m invest in icici pru discovry fund (growth) through SIP. Is this investment eligible for tax exemption?

    • Vikas, I hope your question is whether it is eligible for tax exemption u/s 80C. Answer is NO. Only ELSS mutual funds are eligible for tax benefits u/s 80C. They have lock in period of 3 years.

  • Priyajit

    Hello Suresh,

    Plz let me know what is the tax implications on purchasing GOLD ETF in SEP manner ??

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