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Difference Between Tax Free and Tax Saving Investment

Death and taxes are the two certain things in life. Taxpayers keep looking for investment options that may provide them with satisfactory tax benefits. There are various options to help you out in this aspect.

However, if you explore this domain a bit more, the two major things you will come acrossi.e.tax free investment options and tax saving investment options.

In this article, let’s find out the difference between these two investment options and who should invest in them.

What are Tax Saving Investments?

As you can already comprehend with the name, tax saving investments are the ones that help you to decrease your tax liability to a great extent. For instance, suppose you made Rs. 5,00,000 in a year.

By investing in specific tax-saving instruments, you get to save and claim a deduction by investing up up to Rs. 1,50,000 in a year under Section 80C of the Income Tax Act.

These instruments comprise subscriptions to specific NABARD bonds, contributions to Public Provident Fund, deposits in Sukanya Samriddhi Account, or a five-year long-term deposit with the post office or any of the banks.

However, keep in mind that the income from any of the tax-saving instruments might or might not get exempted from the tax.

What are Tax Free Investments?

On the other hand, if you wish to save taxes on your interest income or any other income coming from investments, a tax-free instrument should be chosen.

These tax-free bonds include REC, HUDCO, NHAI and PFC. They are issued by state companies and generally have a maturity period of 10-years or more.

These bonds can be purchased either during the primary issue or once they get listed in the secondary market.

Differences between Tax Saving and Tax-Free Investments

There are only two major aspects that distinguish tax saving and tax-free investments. Here are the differences:

·         Tax free options offer interest that is not taxable; whereas capital gains may be applicable on tax saving investments.

·         For tax saving investments, investors can claim deductions under the section 80C; on the other hand, this option is not available in tax free bonds.

To understand this detail in a comprehensive manner, jotted down below is a breakthrough of differences between tax saving and tax free investments.

·         Suitability Factor:

Considering that tax saving investments such as ELSS are suitable for mid to long-term investments, they are more suitable for those investors who are looking for long-term returns. On the contrary, tax free bonds are appropriate for senior citizens and retirees as they provide regular income.

·         The Risk Factor and Returns:

Talking about the return, tax saving options like ELSS can generate higher returns with higher risks than tax free investments. As tax-free bonds are issued by the state government; it carries less risk.

·         The Benefit:

As far as tax saving investments are concerned, they provide a benefit under the 80C section of the Income Tax Act on the principal amounts. Thus, by investing in these schemes, you can get a deduction of up to Rs. 1.5 lakhs.

Contrary to it, tax free bonds offer an annual coupon, which makes interest accumulated tax free according to section 10 of the Income Tax Act.

Conclusion:

Now that you have understood the difference between tax free and tax saving investment, make sure you choose the right option. In case you need any further information on this topic, we are just a call away.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.