We are approaching the end of the financial year and are in the tax-saving season. If you are earning a high annual income (Rs 25 lakh and more) and the aggregate value of all your home loan EMIs, HRA exemption availed, life and health insurance premiums paid, children’s tuition fees, hostel fees, interest paid on higher education loan, etc. is over Rs 8 lakh in the financial year, the Old Tax Regime still makes perfect sense for you.
With the exemption upper limits for several allowances being increased significantly under the new Income Tax Act 2025 (which comes into effect from 1 April 2026), the OTR now seems to have an edge, particularly for salaried individuals.
It is meaningful to make tax-saving investments and complement investment planning and tax planning. After all, a penny legitimately saved from tax will be a penny earned.
That said, it would be imprudent to invest in any and every tax-saving avenue out there. Ideally, choose tax-saving avenues that are congruent with your personal risk profile and broader investment objectives.
If you are a risk-taker, i.e. some who has the stomach for high risk, young, earning a high income in the accumulation phase of life, own considerable number of assets, has little or no liabilities, and/or whose financial goals are far away, then here are market-linked tax-saving investment avenues you may consider that entitle to a deduction under Section 80C of up to Rs 1.50 lakh in a financial year, and other provisions of the Income Tax Act, 1961.
Equity Linked Savings Scheme (ELSS)
These are diversified equity mutual funds providing tax-saving benefits, and hence, are also popularly known as a tax saving mutual funds.
They are mandated to invest a minimum of 80% of their total assets in equity and equity-related instruments in accordance with the Equity-Linked Savings Scheme 2005, as notified by the Ministry of Finance.
ELSS come with a mandatory lock-in period of 3 years, which is the least among all the other tax-saving avenues. The lock-in instils the discipline of staying invested for the long-term with the objective of wealth creation.
These tax-saving funds invest flexibly across market capitalisation and sectors. And as regards investment style, follow growth or value style, or a blend of the two.
They are suitable for an investment horizon of 3-5 years or so, and do not mind market-linked returns. Not only would you save tax by investing, but potentially it would generate wealth for you, helping to accomplish the envisioned financial goal/s. So, effectively, you get two birds with one stone: tax saving and wealth creation over a period of time.
However, not all ELSS or tax-saving mutual funds are worth your hard-earned money, and hence, it is vital to choose among a plethora of options carefully.
Avoid zeroing in on schemes just based on the historical returns, which may or may not repeat in the future. Also, consider the risk it has exposed investors to, and watch for the portfolio characteristics and risk-adjusted returns for a holistic perspective.
Want to know which are the top 3 ELSS for tax-saving in 2026? Read this article.
Note, you could invest a lump sum or take the Systematic Investment Plan (SIP) route, but the 3-year lock-in period shall apply. In the case of SIPs, your every SIP instalment will be subject to this lock-in, so make sure you are investing thoughtfully, considering your liquidity needs.
Unit Linked Insurance Plans (ULIPs)
These are offered by life insurance companies as insurance-cum-investment plans. They come in various plans – equity-oriented/aggressive, debt-oriented/conservative, balanced/hybrid (mix of equity and debt investments), wealth creation plans, life stage strategy plan, child education plans, retirement/pension plans, and so on. You can choose these depending on your investment objective and asset allocation best suited for you.
Similar to mutual funds, ULIPs have fund managers who look after the investments. Moreover, much like mutual funds, units are allocated to you at the Net Asset Value (NAV) of the respective fund, which serves as the benchmark for calculating market-linked gains or losses.
As regards the insurance coverage, it is usually 10 times the annual premium paid for regular premium policies for individuals below 45 years of age, and for those who are 45 years and above, it is usually 7 times.
Note, certain ULIPs allow you to opt for higher coverage, sometimes up to 25x or 40x of the annual premium, depending on the insurer’s underwriting rules and your health profile.
And in the case of a single premium policy, generally, the insurance coverage is 1.25 times the single premium paid.
The minimum sum assured or insurance coverage requirement (of 10 times annual premium paid) is critical for the maturity proceeds to be exempt under Section 10(10D) of the Income Tax Act, 1961. Otherwise, the maturity proceeds may become taxable, and the deduction under Section 80C will be limited to 10% of the sum assured.
As regards the death benefit, the IRDAI mandates that, irrespective of market-linked performance of ULIPs, it should be at least 105% premiums paid up to the date of death.
The minimum premium paying term for ULIPs, under regular/annual premium, is 5 years.
5 years is also the minimum lock-in period for ULIPs, and this is also applicable to single premium ULIPs.
As regards the maximum term, it is up to the policy term, usually 15, 20, 25 and 30 years – some even longer.
Keep in mind that ULIPs levy higher allocation charges (premium allocation charges, administration charges, mortality charges, etc.) in the initial years. Hence, it is recommended that you continue the policy for a longer period, whereby money compounds and you recover the high initial charges.
In the case of ULIPs, returns may be impacted due to the added insurance cost and other related charges.
So, they may be marketed as vehicles to achieve financial goals like children’s education and retirement, but high investment costs and low returns often make them less effective in reality.
For wealth creation needs, a portfolio of carefully selected mutual funds is a better option, and it is best to keep insurance and investment needs separate.
National Pension Scheme
This government-backed scheme, introduced in 2009, is available to citizens aged between 18 and 75 years to facilitate retirement planning and tax planning, and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
It comes with two accounts: Tier-I and Tier-II.
Tier-I Account – This account is mandatory, and the minimum investment amount is Rs 500 per contribution and Rs 1,000 per year.
If you do not contribute the minimum yearly contribution, the account will be frozen. And to unfreeze the account, you need to contribute the total sum of the minimum contributions missed and a penalty of Rs 100 per year. You get to decide how and where money will be invested. You broadly have two choices: Active or Auto.
The ‘Active’ choice allows you to choose asset classes – E, C, and G, i.e. Equity (which carries high risk-reward), Credit risk-bearing fixed income instruments other than debt securities (which carry moderate risk), and Government securities issued by the central and state government (which carry low risk). Plus, it also invests in Alternative assets, such as REITs and InvITs, where the limit is 5% of the total assets.
You can choose from these choices according to your needs. For risk takers with a longer investment horizon, equity is a good choice. In the case of the ‘Auto’ choice, which is the lifecycle fund, money is automatically invested based on your age profile as a subscriber.
So, typically, you have the Aggressive Auto Fund (investing up to 75% into equities up to age 35, gradually decreasing thereafter), the moderate fund (investing up to 50% in equities up to age 35, gradually reducing thereafter), and the Conservative Auto Choice Fund (investing up to 25% into equities, reducing further with age).
The lifecycle option helps to automatically rebalance the asset allocation as per your age, helping mitigate risk. If you don’t specify the choice while investing, the ‘Auto’ choice will be the default option. Keep in mind, the contributions made to the tier-I account are subject to a lock-in until you are 60 years of age.
The contributions made to the tier-I NPS account are eligible for deduction of up to Rs 50,000 in a financial year. This is over and above the deduction of up to Rs 1.5 lakh allowed under Section 80C and 80CCD(1).
Moreover, if your employer contributes to the tier-I account, an additional deduction under Section 80CCD(2) is available, which is limited to 10% of salary for private-sector employees, and 14% in the case of government employees. What’s important is that this additional deduction is available under both the OTR and the New Tax Regime (NTR).
At the age of 60, you could withdraw 60% of the corpus tax-free; the remaining 40% must be used to purchase an annuity, which provides a regular pension. The pension received will be taxable according to your income-tax slab.
As per the new NPS rule, you could also withdraw up to 80% as a lump sum, but only 60% remains tax-free. If the corpus built under the tier-I account is less than or equal to Rs 5 lakh, you could withdraw 100% of the amount without any tax liability.
Say you do not want to withdraw a lump sum at 60 years, there is also a deferment option up to 75 years of age, and thereafter, you need to purchase an annuity. In case you wish to prematurely withdraw before 60 years, it is possible after a minimum of 5 years of investments. Here, you could withdraw only 20% of the total corpus, with the remaining 80% mandated for an annuity. The 20% lump sum withdrawn is tax-free, while the annuities received are taxable (as per your income-tax slab).
Note, in case of premature withdrawal, if the accumulated corpus is less than or equal to Rs 2.5 lakh, you can withdraw 100% of the amount as a lump sum. Ideally, you shouldn’t be prematurely withdrawing (unless you need the money for a medical emergency), because the objective of NPS is to build a respectable retirement corpus and buy a life annuity.
Tier-II Account – This is a voluntary account. To have it, you first need to open a Tier-I NPS account. The tier-II account can be opened with a minimum contribution of Rs 1,000. The subsequent contributions can be Rs 250 per transaction.
There is no lock-in period for the tier-II account. But if the tier-I account is frozen due to non-payment of contributions, the tier-II account also becomes inaccessible. You have the same Active or Auto choice options as Tier-I, but they are managed separately.
If you are a central government employee, you can claim a deduction of up to Rs 1.50 lakh under Section 80C for contributions made into this account, but subject to a lock-in of 3 years. For other employees, there is no tax benefit for contributions made to the tier-II NPS account.
From the tier-II account, you are permitted to withdraw as and when you wish to. There’s no penalty whatsoever. So, the tier-II account serves just like your savings account. But the returns made from this account are subject to capital gain tax.
To Conclude…
Quite a few options exist for tax-saving if you are a risk-taker and do not mind market-linked returns. But considering the investment objective, the goals you are addressing and the time in hand to achieve those envisioned goals, it is important to make a prudent choice.
In case you are not sure which regime to opt for and the kind of tax-saving investments to make, reach out to your tax consultant. Avoid taking ad hoc decisions.
Happy tax planning and investing!
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