Tax free Interest Income in India

22 Aug, 2021

6 min read

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Investing in the market is no longer exclusive to expert investors but those new to the market can take advantage of a number of investment tools too owing to the dissemination of knowledge pertaining to the same and the growing number of investment options that cater to beginners as Read on to understand the ways in which you can earn a tax-free interest income in India with the aid of tax-saving offerings listed below.

Public Provident Fund

The interest earned via a public provident fund (or PPF) is not taxed. Furthermore, income accrued via a PPF is eligible for tax benefits as per Section 80C of the Income Tax Act. Interest applicable to PPF is far superior to that issued to fixed deposits across most national banks in India. The current interest rate applicable to PPFs amounts to 7.10 percent per annum. It is important to remember prior to investing in a PPF that it is a long-term investment instrument and the lock-in time frame amounts to 15 years. Those seeking to build a corpus during a later stage in life might want to pick this investment option.

Voluntary Provident Fund (or VPF)

This serves as a voluntary contribution that surpasses the statutory EPF contribution. Only those of whom are salaried individuals that are members of EPFO have the liberty to invest in voluntary provident funds. The amount of money that an employee seeks to contribute to such a fund is inconsequential as the employer will contribute no more than 12 percent of the salary the employee in question receives. The current rate of interest applicable to voluntary provident funds amounts to 8.50 percent. Contributions made to such funds qualify for tax deductions as per Section 80C of the Income Tax Act. Investments made of up to INR 2.5 Lakhs in a year, interest earned, and maturity proceeds are each exempt from taxes.

Tax-Free Bonds

Certain government-owned institutions are permitted to raise funds via tax-free bonds. These institutions include but aren’t limited to the Indian Railways Finance Corporate (or IRFC) and HUDCO. Interest accrued via each of these bonds is entirely tax-free. India presently permits these bonds to be listed on the stock exchanges. Take for instance IRFC bonds which are part of tax-free bonds 2021 and  have an 8.65 percent interest rate. That being said, these bonds need to be bought at a price of INR 1,290 which can lower your yield. Another drawback to this investment is the fact that there isn’t a lot of liquidity.

Unit Linked Insurance Plans (or ULIPs)

Unit linked insurance plans also tax-free income to those that invest in them. You are also entitled to insurance that amounts to 10 times the premium you pay. ULIPs have gained in popularity over the years. As an investor, you can benefit from tax deductions that amount to up to INR 1.5 Lakhs as per the aforementioned Section 80C of the Income Tax Act. That being said the returns on this aren’t the best as a large chunk of your money is directed towards a number of charges such as those pertaining to administrative purposes or mortality. The lock-in period amounts to 5 years although it could be more in some cases.

Interest on Savings Bank Accounts

The interest you earn on savings in your bank account isn’t taxed provided the interest you earn in the course of a year amounts to under INR 10,000 across each of the savings bank accounts issued to you. You can thereby make investment and saving plans in accordance with this rule. It is important to note however the interest rates applicable to savings bank accounts are modest. Should you choose to go about this method, select a small finance bank where the interest rate applicable to savings bank accounts amounts to 6 percent for balances that exceed INR 10 Lakhs. Furthermore, inflation overarching returns aren’t a possibility with this plan.

Conclusion

It is important to note that when you look into tax-free investment products it is important to do adequate research such that the time frame, investment option, interest applicable, and earning capacity match your investment goals.

FAQs

Q1. What is an EPF?
A1. An EPF is an Employee Provident Fund that serves as a retirement benefits scheme that is organized by the Employees’ Provident Fund Organization.

Q2. What is Section 80C of the Income Tax Act?
A3. Section 80C of the Income Tax Act pertains to expenditures and investments that are exempt from having income tax be applicable to them. A maximum deduction of up to INR 1.5 Lakhs is permissible under the same.

Q3. What does VPF stand for?
A3. VPF stands for a Voluntary Provident Fund.

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