How to Earn Tax-Free Income Through Long-Term Investment Plans

For any investor, the goal is to maximize the real return on savings. In India, this often means focusing not just on high returns, but on maximizing tax-free income in India through strategic, long-term instruments. An investment offering 8% returns is far superior to one offering 10% if the 8% is entirely tax-exempt while the 10% is fully taxable.
The key lies in understanding the difference between tax deduction (reducing taxable income) and tax exemption (money received tax-free). This guide from ABSLI outlines the best long term investment plans with high returns in India that ensure your hard-earned wealth remains untouched by the taxman.

Pillar 1: The Triple Tax Exempt (E-E-E) Guarantee

The most secure category of tax free investment options in India is the E-E-E status, where funds are tax-exempt at all three stages: Contribution, Accumulation, and Withdrawal.
The best source of tax free income in India is the government-backed Public Provident Fund (PPF) and Employee Provident Fund (EPF), both of which ensure that the entire maturity corpus is 100% tax-free.

1. Public Provident Fund (PPF)
   

• Triple Exempt Status: PPF is the quintessential E-E-E instrument. Contributions (up to ₹1.5 Lakh) are deductible under Section 80C , interest is tax-exempt, and the final maturity amount is tax-free.
• Returns: PPF offers a fixed interest rate (currently around 7.1% for Q2 FY 2025-26)⁽²⁾, making it a high-safety choice backed by the Central Government.
• Long-Term Strategy: The 15-year lock-in period reinforces its role as a core, long term investment plan for risk-averse investors.
  

2. Employee Provident Fund (EPF)
   

• Mandatory E-E-E: Mandatory for most salaried employees, the EPF contribution is automatically tax-deductible under Section 80C, and the entire corpus is tax-free upon withdrawal after five years of continuous service.
• Returns: EPF offers a high fixed return (currently 8.25% for FY 2024-25)⁽²⁾, often setting the benchmark for safety and return.

Pillar 2: Life Insurance and the Power of Section 10(10D)**

Life insurance products are unique because they offer dual tax benefits***: deduction on the way in, and tax-free receipts on the way out, subject to premium limits.
Maturity payouts from life insurance, including Endowment, Money-Back, and certain ULIPs, are classified as income tax free income in India under Section 10(10D)** if the annual premium does not exceed 10% of the Sum Assured.

1. The Critical 10(10D)** Rule
   

For policies issued after April 1, 2012, the maturity or survival benefit (including bonuses) is completely tax-free only if:
The annual premium paid in any year during the policy term does not exceed 10% of the actual Sum Assured.

2. ULIPs and the High-Value Investment Rule
For high-net-worth individuals, recent budget changes have restricted the tax-free status of high-value Unit-Linked Insurance Plans (ULIPs).

• Taxable ULIPs: ULIPs purchased on or after February 1, 2021, will lose their tax exemption under 10(10D)** if the aggregate annual premium exceeds ₹2.5 Lakh in any single year(1).
• Tax-Free ULIPs: ULIPs with an annual premium of ₹2.5 Lakh or below still enjoy the E-E-E status, offering the triple benefit of protection, equity-linked returns, and tax-free maturity, making them strong long term investment plans with high returns in India.
  
  

3. Pure Term Insurance
   

• Death Benefit: The death benefit (Sum Assured) paid to the nominee is always 100% tax-free under Section 10(10D)**, regardless of the premium size. This makes term insurance the most efficient tool for tax-free wealth transfer.

Pillar 3: Growth and Passive Income (Partial Tax Exemption)

Beyond the secure debt instruments, growth-oriented and guaranteed^# income options offer tax advantages, even if the final payout isn't entirely exempt.
For growth, ELSS mutual funds and the National Pension System (NPS) are ideal, providing tax deductions during contribution and partially tax-exempt returns upon withdrawal.

• ELSS: This is the shortest lock-in (3 years) tax-saving instrument under 80C. While the growth portion is taxable (LTCG exceeding ₹1 Lakh is taxed), it is one of the best avenues for high-growth long term investment for young earners.
• Tax-Free Government Bonds: Issued by PSUs and government entities, the annual interest received from these bonds is completely exempt from income tax, making them highly attractive tax free investment options for retirees or those in the highest tax bracket seeking steady, passive income.

Conclusion

The path to generating substantial income tax free income in India is paved with strategic choices, primarily utilizing the power of government statutes. Build your portfolio's base with the E-E-E protection of PPF and EPF. Use life insurance policies and ULIPs (within the premium limits) to ensure large future payouts, like children's education and your death benefit, are legally tax-free. By prioritizing these long-term instruments, you safeguard both your family’s protection and your future wealth.

Sources

⁽¹⁾ Income Tax Act, 1961 (All Tax Sections: 80C, 80CCD, 10(10D)**, 10(15)):

• Source: Government of India, Income Tax Department
• Source Link: https://incometaxindia.gov.in/Documents/income-tax-act-1961-as-amended-by-finance-act-2025.pdf
• (Primary source for all statutory tax provisions, including E-E-E status, 80CCD(1B) deduction, 10(10D) rules, ULIP limits, and Tax-Free Bonds.)
  

⁽²⁾ EPF and PPF Interest Rates (2024-2025):

• Source: Ministry of Finance and Employees' Provident Fund Organisation (EPFO)
• Source Link: https://www.epfindia.gov.in/site_docs/PDFs/MiscPDFs/InterestRate_OnPFAccumulationsSince1952.pdf
• https://economictimes.indiatimes.com/wealth/invest/epf-interest-rate-8-25-for-2024-25-whats-actual-interest-amount-you-will-get-in-your-epf-account-now-heres-how-to-calculate-it/articleshow/118624352.cms?from=mdr
• (Primary source for official government fixed returns: EPF (8.25% for FY 24-25) and PPF (7.1% for Q2 FY 25-26).)