Tax Free Interest Income Options in India 2024 (2024)

National Pension Scheme (NPS)

NPS or the National Pension Scheme, is an extremely popular tax-free interest income option in India as it provides much higher returns in comparison to other investment schemes. It also provides multiple investment options and a pension fund to the subscribers. Under NPS, the subscribers can get additional tax benefits by allowing a taxpayer to save tax under multiple sections of the Income Tax Act.

• Investors can claim a deduction of Rs.1.5 lakhs under section 80CCD(1).
• An additional deduction of Rs.50,000 can be claimed under section 80CCD(1B).
• Additional tax benefits are allowed on investments routed through the employer under section 80CCD(2).

Unit Linked Insurance Plan (ULIP)

ULIP is an insurance plan that offers dual benefits of both wealth creation and a life cover to protect your loved ones from any unfortunate happening. ULIP is considered flexible in nature as it does not have any lock-in period and also allows periodic withdrawals from the fund.

Tax benefits under ULIP plans are as follows:

• Section 80C:
  You can avail deductions of up to Rs. 1.5 lakhs per annum from your income for premiums paid under Section 80C of the Income Tax Act, 1961. This option helps in reducing taxable income and saving tax.
• Tax-Free Death Benefit Under Section 10 (10D):
  The death benefit received from ULIPs is tax-free. However, if you surrender your ULIP before 5 years, the death benefit will be subject to tax.
• Tax-Free Maturity Benefit Under Section 10 (10D):
  The maturity benefit from ULIPs is tax-free if the total premiums paid do not exceed Rs. 2.5 lakhs. Surrendering before 5 years makes maturity returns taxable.

Tax-Saver Fixed Deposit (FD) Scheme

Tax-Saver Fixed Deposits (FDs) represent a specific type of fixed deposit scheme provided by banks in India, offering tax benefits under the Income Tax Act 1961. These investment options entail a lock-in period of 5 years, during which the deposited sum remains inaccessible.

• Tax Deduction Under Section 80C:
  The amount invested in Tax-Saver FDs is eligible for a tax deduction of up to Rs. 1.5 lakhs annually.
  This deduction falls under Section 80C of the Income Tax Act and is accessible to individual taxpayers as well as Hindu Undivided Families (HUFs).
  The deduction applies in the year of investment in these tax-saving options.
• Exempted Interest:
  Interest accrued on Tax-Saver FDs is subject to taxation based on an individual's income tax slab rates.
  However, the interest income remains exempted from Tax Deduction at Source (TDS) up to Rs. 40,000 per financial year (Rs. 50,000 for resident senior citizens).
• Taxation on Maturity:
  Upon maturity, the proceeds, comprising both principal and interest, become taxable in the year of maturity.
  The interest income is added to an individual's total income and taxed at the applicable income tax rates.
  No TDS is deducted from the maturity amount under these schemes.

Sukanya Samriddhi Yojana (SSY)

The Sukanya Samriddhi Yojana (SSY) is a savings scheme introduced by the Government of India. This tax-saving investment initiative aims to support the welfare of the girl child and encourage parents to save for their daughter's future expenses, such as education and marriage. Initially launched as a small deposit scheme as part of the 'Beti Bachao Beti Padhao' campaign, it has also gained popularity among a significant portion of salaried individuals who view it as a tax-saving investment option in their portfolio.

• Tax Deductions Under Section 80C:
  Investors can avail a deduction of up to Rs. 1.5 lakhs annually on investments made in SSY, in line with tax benefits under Section 80C of the Income Tax Act, 1961.
• Exemption From Interest Income Under Section 10 (1D):
  Interest earned on SSY investments remains tax-free, benefiting from exemptions provided under Section 10(10D) of the Income Tax Act, 1961.

National Savings Certificate (NSC)

The National Savings Certificate (NSC) is a secure investment avenue that provides tax advantages, making it an attractive choice for investors seeking long-term, guaranteed returns. Here are the tax benefits under NSC.

• Tax Deduction Under Section 80C:
  Investing in NSC allows for a deduction under Section 80C of the Income Tax Act.
  The maximum limit for this deduction is Rs. 1.5 lakhs per financial year.
• Tax Saving on Accrued Interest:
  Interest earned on NSC investments remains tax-free for the initial 4 years.
  The accrued interest is reinvested and qualifies for Section 80C deduction.
  After the initial 4 years, the interest earned becomes taxable based on your income tax bracket.
• Tax Benefits for TDS on Interest Earned:
  While interest from NSC is taxable, no Tax Deducted at Source (TDS) is deducted.
  It is your responsibility to declare the interest earned and pay taxes while filing your Income Tax Return (ITR).

Senior Citizens Savings Scheme (SCSS)

The Senior Citizen Savings Scheme, launched by the Government of India, provides senior citizens (aged 60 years and above) with a secure and lucrative investment opportunity providing attractive interest rates. Here are the tax benefits available under the Senior Citizen Savings Scheme:

• Tax Deduction Under Section 80C:
  Principal deposits made in SCSS are eligible for an annual deduction of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act.
• Exemption from TDS:
  No Tax Deducted at Source (TDS) is levied if the interest earned from SCSS is Rs. 50,000 or less annually. However, TDS is applicable if the interest exceeds Rs. 50,000.
• No Tax on Maturity Amount:
  The maturity amount received from the Senior Citizen Savings Scheme is tax-free. This implies that both the principal and the interest earned are not subjected to taxation upon maturity.

Public Provident Fund (PPF)

Under Section 80C, individuals can decrease their taxable income by investing in the Public Provident Fund (PPF). This scheme falls into the "exempt-exempt-exempt" (EEE) category, meaning investors can claim deductions on their invested amount and are not liable to pay tax on the interest earned or the maturity amount. Furthermore, the PPF scheme is highly secure due to its sovereign guarantee. The PPF interest rate is revised every quarter by the Central Government. Currently, the rate offered is 7.1%.

Now that you know about the various tax free interest income in India, you can go ahead and choose the most beneficial ones for you. And if you are still confused about which scheme to choose, let our tax experts help you select the best schemes as per your needs so that you can keep more of what you earn. Book an online CA Now!