Best Tax Saving Investment Options for Traders
If you are a trader in India, your tax situation is different from a normal salaried person. You do not get Form 16. You do not have a fixed salary. Your income comes from buying and selling shares, derivatives, or commodities. Many traders think tax saving is only for people with a job. This is wrong.
As a trader, you can save tax. But you have to choose the right investments. This article gives you the best tax saving investment options for traders. We also talk about tax-saving schemes for women, tax-free investment with high returns, and best tax-free return investments in India. Let us start with the most important thing.
Why Traders Need Different Tax Saving Plans?
A salaried person saves tax under Section 80C. They put money in PPF, ELSS, or life insurance. But for a trader, income is treated as business income or capital gains. It depends on how you trade.
If you trade often and your main work is trading, then your income is business income. You can show expenses like internet, laptop, and even electricity. You also have to pay advance tax.
But when it comes to saving tax, many of the same options work for you too. You can still use Section 80C. You can still invest in tax-free plans. You just need to know which ones give you the best benefit.
Let us look at the best options one by one.
1. ELSS – Equity Linked Savings Scheme
ELSS is a type of mutual fund. You put money in shares through this fund. The best part is that you get tax benefit under Section 80C. You can invest up to 1.5 lakh rupees in a year and reduce your taxable income by that amount.
ELSS has a lock in period of only three years. This is shorter than PPF or NSC. For a trader, this is good because your money is not stuck for too long. After three years, you can take it out. The returns are market linked but over time, ELSS has given good returns.
You can start with a small amount. You can do a systematic investment plan or SIP. This means you put a fixed amount every month. It is easy and disciplined.
Read More: How to Calculate Investment Returns Easily | Simple SIP Guide India
2. PPF – Public Provident Fund
PPF is a very safe option. The government runs it. You can open a PPF account in any post office or bank. The money you put in PPF is fully tax free under Section 80C. The interest you earn is also tax free. And when you take the money out after 15 years, that is also tax free.
The interest rate is around 7 to 8 percent. It changes every three months. The lock in period is 15 years. But you can take a loan against your PPF after some years. For a trader who wants zero risk, PPF is a good choice.
The only problem is that you cannot take the money out easily. So do not put all your savings here. Put some part for very long term safety.
3. NPS – National Pension System
NPS is for retirement. You put money in this scheme and the government also gives you tax benefit. Under Section 80C, you get benefit up to 1.5 lakh. There is an extra benefit of 50,000 rupees under Section 80CCD(1B).
But there is a small problem. When you retire, you have to use 40 percent of the money to buy an annuity plan. This annuity gives you a monthly pension. The remaining 60 percent you can take as lump sum. The lump sum amount is tax free.
For a trader who thinks long term, NPS is good. But if you need money before 60 years, NPS is not for you. So use NPS only for retirement planning.
4. Life Insurance Premium
If you have a life insurance policy, the premium you pay every year is tax free under Section 80C. But only if the premium is less than 10 percent of the sum assured. If you pay more than that, you do not get full tax benefit.
Do not buy life insurance only for tax saving. Buy it because your family needs protection. As a trader, your income is not fixed. If something happens to you, your family should be safe. So a term insurance plan is a very good choice. Term insurance has low premium and high cover. The premium you pay for term insurance is fully tax free under 80C.
Do not mix insurance and investment. Do not buy ULIPs or endowment plans just for tax saving. They give very low returns.
5. National Savings Certificate (NSC)
NSC is a small saving scheme. You can buy it from any post office. You put a fixed amount for 5 years. The interest you earn is also reinvested and you get tax benefit on that too.
The interest rate is around 7 percent. It is safe. For a trader who wants a simple, no risk option, NSC is good. But the lock in is 5 years. You cannot take the money out before that. So only put money you do not need for 5 years.
6. Sukanya Samriddhi Yojana (For Women Traders or for Girl Child)
This is a very good tax-saving scheme for women. If you have a girl child, you can open this account in her name. You can put money every year. The interest rate is higher than PPF. It is around 8 percent.
The money you put is tax free under 80C. The interest is tax free. The maturity amount is also tax free. The account matures when the girl turns 21 years or when she gets married after 18 years.
If you are a woman trader, you can also open this account for your daughter. It is one of the best tax-saving schemes for women in India.
Tax-Free Investment with High Returns
Many traders ask one question. Which tax-free investment gives high returns? The truth is, no investment gives very high returns without risk. But some options give good returns and are fully tax free.
Sovereign Gold Bonds
Sovereign Gold Bonds are issued by the Reserve Bank of India. You buy digital gold through these bonds. The bond gives you interest of 2.5 percent per year. This interest is taxable. But the main gain comes from gold price increase. When gold price goes up, you get that benefit. And if you hold the bond until maturity (8 years), the capital gain is tax free.
For traders who want something different from shares, Sovereign Gold Bonds are a good choice.
Tax Free Bonds
Some government companies issue tax free bonds. For example, NHAI, REC, PFC, IRFC. These bonds give you fixed interest. The interest is fully tax free. The returns are usually 6 to 7 percent. They are safe. You can buy them on the stock exchange.
These are among the best tax-free return investments in India for people who want safety.
PPF (Already discussed)
PPF gives around 7 to 8 percent fully tax free. For a risk free option, this is one of the best.
Best Tax-Free Return Investments in India – Quick List
Here is a simple list for you.
- PPF – 7 to 8 percent, fully tax free, 15 years lock in
- Sovereign Gold Bonds – Gold price gain tax free at maturity, 8 years lock in
- Tax free bonds (NHAI, REC, PFC) – 6 to 7 percent tax free, tradable on exchange
- Sukanya Samriddhi – 8 percent tax free, for girl child
None of these give 15 or 20 percent returns. That is not possible with tax free schemes. But they give safe, guaranteed, and fully tax free returns.
Tax-Saving Schemes for Women Traders
If you are a woman trader, you have some special options. Sukanya Samriddhi we already discussed. But there are other things also.
You can open a PPF account in your own name. You can also open a PPF account for your minor child. That gives separate tax benefit.
If you are a woman and you earn less than 5 lakh rupees in a year, you pay zero tax under the new tax regime. In that case, you do not need to do tax saving investments. But if your income is more, then these options help.
Women traders should also look at joint holding of investments. If you invest with your husband, you can split the tax benefit. But talk to a CA before doing this.
Common Mistakes Traders Make While Saving Tax
Many traders make these mistakes. Avoid them.
Mistake 1 – Not showing business expenses
As a trader, you can show expenses like internet bill, phone bill, laptop depreciation, even rent for your office or work from home space. These reduce your taxable income. Do not ignore this.
Mistake 2 – Mixing trading and investment
If you buy a share and sell it within one day, that is trading. If you buy and hold for years, that is investment. Keep them separate. The tax rules are different. Trading income is business income. Investment profit is capital gains. Mixing them creates problems during income tax filing.
Mistake 3 – Forgetting advance tax
If your tax liability is more than 10,000 rupees in a year, you have to pay advance tax. Many traders forget this. Then they pay interest penalty. So calculate your expected tax every three months and pay on time.
Mistake 4 – Putting all money in tax saving schemes
Only invest for tax saving if you actually need to save tax. If your income is not high, do not block your money in 5 or 15 year lock in plans. First build an emergency fund. Then think about tax saving.
Should You Use Old Tax Regime or New Tax Regime?
This is a big question for traders. Under the new tax regime, tax rates are lower but you cannot claim most deductions. Under the old regime, rates are higher but you can claim 80C, 80D, and other deductions.
Most traders with income above 7 to 8 lakh rupees are better off with the old regime. Because you can claim 1.5 lakh under 80C, plus health insurance, plus business expenses. But every person is different. Do the math or ask a CA.
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Example Calculation for a Trader
Let us say you are a trader. Your business income after expenses is 10 lakh rupees in a year.
Under old regime:
- You invest 1.5 lakh in ELSS and PPF combined.
- Your taxable income becomes 8.5 lakh.
- Tax as per old slab rates – around 70,000 to 80,000 rupees.
Under new regime:
- You cannot claim 80C.
- Your taxable income is 10 lakh.
- Tax as per new regime – around 75,000 rupees after rebate.
The difference is small. But if you also have health insurance premium, home loan interest, then old regime gives more benefit. So do not blindly follow anyone. Calculate for yourself.
Final Words for Traders
Do not run behind tax saving only. First focus on making more profit from your trading. Then save tax legally. Do not invest in a plan just because someone said it saves tax. Understand the lock in period, returns, and risk. If you are a woman trader, use Sukanya Samriddhi if you have a daughter. Use PPF and tax free bonds for safety.
If you want tax-free investment with high returns, remember that high returns come with high risk. The best tax-free return investments in India are PPF, Sovereign Gold Bonds, and tax free bonds. They are safe and give steady returns.
Lastly, talk to a good chartered accountant once a year. Tax rules change every budget. A CA will help you save money and avoid penalties. Keep your trading records clean. File your ITR on time. And invest wisely for your future.
FAQs
Can a trader claim Section 80C?
Yes. Trader income is business income. Section 80C applies to all individuals. You can claim 1.5 lakh deduction.
Is STT paid on trading tax deductible?
No. Securities Transaction Tax (STT) is not allowed as a business expense. You cannot deduct it from your income.
Can I show loss from trading and still invest in tax saving schemes?
Yes. But if you have loss, your income is low. Then tax saving investments are not useful. First adjust your losses against other income.
Which is better for trader – ELSS or PPF?
For short to medium term (3 to 5 years), ELSS is better. For very long term safety, PPF is better.
Do I need to file ITR if I invest in tax saving schemes?
Yes. You must file ITR. Just investing does not mean you do not have to file. Filing is separate.