Are You a Risk-Averse Investor? Here Are Your Best Tax-Saving Investment Options for FY25

However, delaying tax planning until the last moment can lead to haphazard investment decisions and costly financial mistakes. Not all tax-saving options are best suited for you, making it crucial to choose investments based on your risk tolerance, investment horizon, and financial objectives.

It would be prudent to assess whether you're a risk-averse or an aggressive investor, as this will help integrate tax planning with overall investment strategy effectively.

Having said that, a risk-averse investor is someone who prioritises capital preservation over high returns. They tend to prefer investment options that offer stability, regular income, and assured returns rather than overexposing their hard-earned capital to market fluctuations.

Risk-averse investors include retirees or individuals nearing retirement, salaried professionals with dependents, or first-time investors who prefer security over high gains.

On the other hand, an aggressive investor is someone who prioritises high returns over capital preservation and is willing to take greater risks. This group often includes young professionals, entrepreneurs, or individuals with substantial disposable income who can afford to navigate market fluctuations.

[Read: Opting for the Old Tax Regime? Here Are the Best Tax-Saving Investments]

If you are someone who is uncomfortable with taking risks, instruments that provide market-linked returns like Equity-Linked Savings Schemes (ELSS) and Unit-Linked Insurance Plans (ULIPs) are not suitable for you. These instruments invest in market securities such as stocks, making their returns dependent on market performance which may not provide capital safety.

Instead, traditional tax-saving instruments such as the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), and Senior Citizens' Savings Scheme (SCSS) may be more suitable. These government-backed schemes have offered competitive interest rates in recent years, although rates are subject to periodic reviews and revisions.

Additionally, with the Reserve Bank of India (RBI) reducing the repo rate by 25 basis points in February 2025 - the first cut in nearly five years - locking in bank fixed deposits before banks lower interest rates in response to the policy change could be a prudent decision.

It is important to note that the tax benefits on the investments discussed apply to the Old Tax Regime.

The default New Tax Regime simplifies tax filing and aims to increase disposable income, particularly with the Union Budget 2025-26 raising the rebate limit under Section 87A and effectively making income up to Rs 12 lakh tax-free. However, it does not offer key deductions such as those under Sections 80C and 80D.

[Read: Union Budget 2025: Is the New Tax Regime Really Beneficial for You]

The following tax-saving investment options allow you to claim deductions of up to Rs 1.5 lakh per financial year under Section 80C of the Income Tax Act.

1. Public Provident Fund

The Public Provident Fund (PPF) is one of the safest investment options and enjoys Exempt-Exempt-Exempt (E-E-E) tax status. This means that contributions qualify for a tax deduction under Section 80C, the interest earned is exempt from tax, and the maturity proceeds remain tax-free.

You can open a PPF account at nationalised banks or post offices in your own name or on behalf of a minor, but note that joint accounts are not permitted.

PPF has a 15-year lock-in period, promoting disciplined savings while offering compounded annual returns (currently 7.10% p.a.).

[Read: PPF Calculator: A Simple Tool to Grow Your Retirement Corpus]

This long-term nature makes it an attractive option for retirement planning, though you should factor in liquidity needs, as withdrawals are restricted before maturity.

PPF allows a minimum deposit of Rs 500 and a maximum of Rs 1.5 lakh per financial year, either as a lump sum or in up to 12 instalments.

2. Senior Citizen Savings Scheme

SCSS is a government-backed investment designed to offer security and guaranteed returns, making it an ideal choice for senior citizens (60 years or more in age). It provides quarterly interest payouts and currently offers an 8.20% per annum interest rate.

Deposits below Rs 1 lakh can be made in cash, while amounts exceeding this must be deposited via cheque. The scheme has a 5-year maturity period, with the option to extend it by 3 years if an extension request is submitted in the final year.

You can open multiple SCSS accounts, either individually or jointly with a spouse. The minimum deposit is Rs 1,000, while the maximum investment limit is Rs 30 lakh, with deposits allowed in multiples of Rs 1,000.

SCSS accounts can be transferred between authorised post offices and banks for convenience.

Premature closure is permitted, but penalties apply:

• If the account is closed within one year, any interest paid will be deducted from the principal amount.

• If the account is closed after one year but before two years, 1.5% of the deposit amount is deducted as a penalty.

• If the account is closed after two years, the penalty is 1% of the deposit amount.

3. Sukanya Samriddhi Yojana

The Sukanya Samriddhi Yojana (SSY) is a government-backed savings scheme launched under the Beti Bachao Beti Padhao initiative to help parents build a financial corpus for their daughter's education and marriage expenses.

You, as a parent or guardian, can open an SSY account at a post office or designated bank anytime between the girl child's birth and till she attains 10 years of age.

The minimum deposit for an SSY account is Rs 250, with subsequent contributions in multiples of Rs 50. The maximum deposit allowed is Rs 1,50,000 per financial year.

SSY currently offers an 8.20% interest rate per annum, compounded annually, and enjoys the Exempt-Exempt-Exempt (E-E-E) tax status similar to PPF.

The account matures after 21 years from the date of opening. However, the girl child can start operating the account from the age of 18. If she marries before the age of 21 (and after the age of 18), the account operation ceases.

4. Bank Fixed Deposits

Tax-Saving Fixed Deposits (FDs) come with a 5-year lock-in period, offering a safe and stable avenue for wealth growth through compounding.

However, the interest earned is subject to tax deduction at source as per provisions of Section 194A of the Income Tax Act, 1961.

Deposits can be held individually or jointly, but only the first holder (a PAN card holder) can claim the Section 80C deduction.

The minimum investment amount is Rs 100 and in multiples thereof, with a maximum limit of Rs 1.5 lakh per financial year. The interest rate varies across banks.

You can choose from three investment options based on your cash flow needs - Reinvestment Deposit, Quarterly Interest Payout, or Monthly Interest Payout.

Tax Deductions for Life and Health Insurance Premiums

In addition to the above, assessees under the Old Tax Regime can benefit from tax deductions on life and health insurance premiums.

Premiums paid for life insurance policies are eligible for deduction under Section 80C, subject to a maximum limit of Rs 1.5 lakh per financial year.

Under Section 10(10D), the maturity proceeds are entirely tax-free, provided the annual premium does not exceed 10% of the sum assured for policies purchased after April 1, 2012.

[Read: SEBI Chief Proposes the Idea of Bundling Insurance with Mutual Funds]

Deductions on health insurance premiums can be claimed under Section 80D as follows:

• Up to Rs 25,000 per year for self, spouse, and children (Rs 50,000 if the insured is a senior citizen).

• An additional Rs 50,000 per year for health insurance premiums paid for parents aged 60 and above.

To Conclude...

Section 80C of the Income-tax Act, 1961, remains one of the most sought-after provisions for tax planning. However, it is essential to select tax-saving investments that align with your risk appetite, ensuring they complement your overall investment strategy.

Instead of making last-minute ad-hoc decisions near the end of the financial year, a more prudent approach is to start investing in the early quarters.

This allows better planning, ensuring that your investments align with your financial objectives, risk tolerance, and help maximise tax benefits.

Happy investing!

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.