Most tax-saving schemes provide both high returns and high security. So, it makes sense to use all the provisions available to save tax while earning money.

The single most important provision is Section 80C. Under it, one can invest up to Rs 1 lakh in approved schemes and save taxes up to Rs 30,900. The investment of up to Rs 1 lakh is deducted from taxable income and tax liability reduced accordingly.

Infrastructure bonds: A deduction of Rs 20,000 in addition to the existing Rs 1,00,000 is allowed in the 2010-2011 Budget if invested in long-term infrastructure bonds. This will enable you to save an additional Rs 6,180 if you're in 30% tax bracket.

Public provident fund (PPF): Investment up to Rs 70,000 allowed. Part of overall limit of Rs 1 lakh under Section 80C. The return, fixed every year, is currently at 8%. This is the only instrument which is completely tax free. Lock-in period: 15 years. Effective post-tax return for a person who pays tax at the rate of 30% is 15.36%.

Insurance premia: Investment up to Rs 1 lakh allowed. But annual premium amount should be at least 20% of the sum assured. Lock-in period: three years. Returns depend on market. Money received on maturity after three years will be tax-free in the case of equity-linked savings schemes (ELSS). But for general insurance schemes, it will be treated as income of that year and taxed accordingly.

Tuition fee: Amount of up to Rs 1 lakh paid as tuition fee for education of two children of an assessee can be deducted from total income. Part of overall Rs 1 lakh limit under Section 80C.

Repayment of home loan: Repayment of principal up to Rs 1 lakh in a year gets tax benefit under 80C. Amount is deducted from taxable income. Payment up to Rs 1.50 lakh as interest on loan taken to buy house for self-use also exempt from tax.

Along with provision of repayment of principal, a housing loan can enable an assessee to get income up to Rs 2.50 lakh exempted.

Pension fund: Investment up to Rs 1 lakh in pension fund of an insurance company can be deducted from taxable income. Part of overall limit of Rs 1 lakh under 80C. Taxable on withdrawal.

Repayment of educational loan: Interest paid while repaying education loan for own, or kin's, higher studies exempt from I-T. Repayment of principal does not qualify for exemption. Not part of cap of Rs 1 lakh under Section 80C.

Premium for mediclaim: You can claim deduction of up to Rs 20,000 for purchase of mediclaim for your parents if they are senior citizens or otherwise up to Rs 15,000. This is besides Rs 15,000 deduction against purchase of mediclaim for yourself.
 

Source: Economic Times