Investments that provide tax-free income

Kavya Balaji   /   March 22, 2021

When you make investments, you might get income from those investments which could include interest income. Most of the time the income from investments is taxable. However, there are some traditional investments that provide tax free income. Here are the ones you can consider.

Sukanya Samriddhi Account

This scheme is good for those who have a girl child at home. This is among the best tax-free investments in India. The advantage for investors is that the interest rate is 7.6 per cent. This is better than most fixed income investments in the country including bank deposits. The second advantage with the Sukanya Samriddhi investment is that it offers tax free interest income to all investors. 

The third advantage is that investments of up to Rs 1.5 lakhs will qualify for tax exemption under Sec 80C of the Income Tax Act. You can invest in the names of up to two girl children. The minimum deposit for the investment is only Rs. 250. The deposit will be for 21 years from the date of opening the account. You can set up auto debit for the investment. Once your child is 18 years of age, you can withdraw 50% of the balance in the account as the previous financial year. This should be for either education or marriage of the child. 

Public Provident Fund (PPF)

There are a number of reasons why you should invest in the PPF. The first and the foremost advantage of investing in PPF is the sovereign guarantee. The second advantage is that the interest rate for the investment is a good 7.1%. Note that now, all small savings schemes offered by the Department of Posts are linked to government securities. Since government securities are traded every day, their prices keep changing constantly. However, since savings scheme interest rates cannot be volatile, the interest rates for the investments are reset every quarter. 

There is no other investment that is backed by the government that gives you more interest than the PPF at the moment. The third advantage is that you can get tax benefits for the investment under Sec 80C. You can start a PPF account with a bank or post office. The interest is tax free and is paid every year. You only need Rs. 100 to start a PPF account. 

Employee Provident Fund (EPF)

EPF enjoys the Exempt-Exempt-Exempt (EEE) status. The interest amount from your EPF account will be tax-free. You can claim tax deductions under Section 80C for the amount invested.  You can also make voluntary contributions over and above the amount contributed by you and your employer. You could invest up to 100% of your basic salary and the dearness allowance. All contributions that you make will earn interest. If you don’t have a job, you can withdraw from EPF.

Tax Free bonds

Tax free bonds from various companies offer you a good interest rate. The interest from these bonds is totally tax free. These tax-free bonds are traded on the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). There is no Tax Deducted at Source (TDS) for the bonds. You can purchase the bonds using your demat account.


For a resident individual who is 60 years or less or a Hindu Undivided Family (HUF), interest earned up to Rs. 10,000 in a financial year is exempt from tax. This is allowed as a deduction from income and is for interest income earned from:

  1. Bank savings account
  2. Savings account with a co-operative bank or
  3. Savings account with a post office

Note that senior citizens are not entitled to benefits under section 80TTA.

Want investments that are tax free on redemption? Invest in equity mutual funds and get tax free income if your gains are less than Rs. 1 lakh. Click here to explore mutual funds.

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