Best 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
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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Suresh
Best Tax Free investments in India
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Hi Suresh..
I have 10 Lakhs and i would like to invest in bank for 5 years. May i know the approximate amount that will be deducted for tax after maturity
Thanks
Ajit, In FD any interest is added to your income and income tax needs to be paid. If you are in 10% tax bracket, you need to pay 10% of interest amount as income tax. Whether you would get this amount in that year or not, but you need to account it and pay it.
Thank you.. so each year 10% of my interest earned will be deducted by bank as tax and the remaining interest earned should be filed for income tax return along with salary… is my understanding correct?
No Ajit. Bank would deduct 10% tax, but when you file IT return, you need to compute income tax for that interest component based on your income tax slab. If it is 10% only, then you need not pay any extra tax. If you fall in 20% tax bracket, you need to pay balance 10% tax and then file IT return.
Hi Suresh,
I have read your articles and I loved them. I need some advise regarding investments. My monthly net salary is 53000 plus quartely incentives (approx 20-40 K+). My total annual CTC is 8 LPA plus incentives. It nearly becomes 10 LPA. So I will be in 30% tax bracket. I recently finished paying 15K monthly maintenance to wife during mutual divorce procedure. I will be now divorced in month of Sep.
Being the only major earning member I couldn't save much earlier because of marriage and other expenses.
I will be turning 30 now. My monthly expenses are 25K including 6000 rent we pay. I can invest 18K per month (This is apart from 1 lakh tax rebate investments I can make). I want to invest in diversified areas. Kindly suggest me best ways where I can invest. I want to diversify my investments between long term and short term. I am thinking of investing in SIPs, recurring deposits, short term FDs, tax free bonds, pension schemes, PPF etc.
Kindly suggest me the best ways to divide my investments between high risk and low risk instruments.
Also, please suggest best SIPs, RDs, tax free bonds. And can you please suggest your views on NPS? Is it a good investment option?
Thanks
Nandan Sharma
You are askinug tooooo many questions in this query. 1) You said 18K you want to invest in tax rebate investments. If you want to get higher returns with some risk, invest in ELSS mutual funds. Invest some part in Tax saver Bank FD’s too or NSC 2) If you are looking beyond tax saving options, you can invest in mutual funds like Reliance equity opps fund, Birla SL Frontline fund or Birla Gennext or ICICI Pru focussed fund etc. To earn higher returns in all markets, you should diversify your portfolio. Say 10% you can invest in gold ETF like SBI Gold ETF or Reliance Gold ETF. 10% invest in sector based funds like Reliance Pharma, SBI FMCG fund etc., NPS is a good option. Pls see this artilce, you would get good idea. https://myinvestmentideas.com/2013/06/complete-guide-on-new-pension-scheme-nps-in-india/
Hi Suresh,
Just came across your blog. Really good job, very informative. Wanted to ask: my father is retd, a senior citizen & doesnt earn any pension. My mom & I are working. Is there any way either me or my mom can invest in my father's name or gift him a sum of money so we reduce our tax liability?
Karthik, You can give money as gift to your father. However, if that money is earning any tax, it would be clubbed with your income and tax is computed on your taxable income.
Thanks for the reply, Suresh. So the only advantage I will have by "gifting" to my father is that – 1. since he is a senior citizen, he will earn a higher interest rate and 2. since he has no other income, the interest he earns from this deposit is not taxable.
Is my understanding right?
Karthik, As indicated in my earlier message, if your gift is earning money, it would be clubbed with your income and you need to pay necessary tax.
Thanks Suresh, got your point.
I purchased 2 kathas 4 chataks land in the year 1984 at Rs. 1 lakh 25 thousand.My land and another land of 2 katha 3 chataks which is situated next to my plot of a different owner are amalgamated and total 4 kathas 7 chataks land we (both owner) handed over to a Promoter. After completion of construction (G + 3 storied building) Promoter handed over 3 nos. flat and 3 nos. Car parking space to us. We (both the owner) are staying in 2 flats and using 2 Car parking space and 1 no. flat with Car parking space are sold. For which I got Rs. 24 lakhs 50 thousand . Now my question is how I save my tax. Further if I want to paid tax, I have to paid how much amount.
Mozumber, Little complicated case. Request you to consult a tax auditor regd this.
I HAVE 5 TO 10 YEARS OF CALCULATIONS FOR PPF,BONDS, MUTUAL FUND DEBT AND EQUITY. I HAVE FOUND THAT PPF AND LARGE CAP FUNDS ARE THE BEST BUT ONE SHOULD REGULARLY INVEST IN THESE PLANS SO THAT OPPORTUNITY TO GROW YOUR MONEY IS MAINTAINED IN TIME. NO NEED TO WORRY . WORRY EATS YOUR LIFE. LET IT GROW MONEYWISE AND LIFEWISE. HEALTHY LIVING WITH ADEQUATE MONEY IS THE BEST. YOU CAN NOT CHANGE THE NATURAL PHENOMENON OF LIFE AND DEALTH. BE HONEST TO EVERYTHING.
BEST OF LUCK TO ALL
N S RAJ