As the financial year is ending, you may be looking for the best tax savings investment options. As per Section 80C of the Income Tax (IT) Act, amount up to INR 1.5 lakh per annum is exempted from tax, on certain investment products.
Here are six tax saving investments:
1. Public Provident Fund (PPF)
PPF has been very popular for several years. It is an exempt-exempt-exempt (EEE) scheme. It means your investment, earnings, and maturity benefits are also tax-free. The current rate of interest on PPF is 7.9%. It is a 15-year plan that may be extended for five years blocks indefinitely.
2. Employee Provident Fund (EPF)
EPF is another investment vehicle that helps you accumulate wealth if you are a salaried person. You contribute 12% of your monthly basic salary in the EPF account. Your employer matches your contribution; however, only 3.67% goes towards the EPF investment. The current rate of interest is 8.65%, which is tax-free provided you stay employed for at least five years.
3. Unit Linked Insurance Plans (ULIPs)
ULIPs are hybrid insurance plans that combine life cover and savings. A certain component of your premium is invested in market-related products to build wealth over the long-term. The duration may be as long as 15 to 20 years; however, the lock-in period is five years. The maturity benefits and the corpus at the time of exit are tax-free.
4. Insurance policies
Traditional insurance policies may be money-back, endowment, or whole life. Term plans are pure risk covers. The former types of insurance policies include savings and are available for a fixed tenure and sum assured. The premium depends on your age, sum assured, and coverage and the same is payable until maturity. The premium qualifies for Section 80C tax deductions. Additionally, death benefits or maturity value are tax-free.
5. Sukanya Samriddhi Yojana (SSY)
This is a small deposit plan for the girl child and is part of the ’Beti Bachao Beti Padhao’ campaign. The current rate of interest is 8.5% per annum. You may invest on behalf of your daughter until she is 10 years old. The minimum deposit amount is INR 1000. A maximum amount of INR 1.5 lakh can be deposited throughout the financial year. The account is operative until her marriage after becoming an adult or for 21 years from the opening date. Just like PPF, SSY is also an exempt-exempt-exempt (EEE) scheme, wherein your principal, interest, and maturity benefits are all tax-free.
6. Equity Linked Savings Scheme (ELSS)
Diversified mutual funds that invest in equities and equity-related instruments are known as ELSS funds. The principal investment is eligible for tax benefits under section 80C of the IT Act. Furthermore, you need to remain invested in these plans for a minimum lock-in period of three years Investments of more than 65% of the fund corpus is done in equity or related products. Therefore, the returns on ELSS funds vary and depend on market performance. You may choose either dividend or growth option. Under the dividend option, you earn a regular income. The growth fund allows you to build wealth in the long-term.
Listed below are three benefits that make ELSS one of the best tax saving investments:
1. Higher returns
Compared to fixed income securities, such as PPF and fixed deposits (FDs), the returns delivered by ELSS plans are higher. When you stay invested for a longer period, you may be able to earn annualized returns of 12% on your ELSS investments. In comparison, most fixed income securities offer a maximum of 9% per annum returns. Although ULIPs may offer ELSS-like returns, the higher management cost makes the latter a better investment option.
2. Shorter lock-in
ELSS has the shortest lock-in period of three years. Other Section 80C investments like PPF, tax-savings FDs, and EPF have much longer lock-in periods. Even ULIPs that are most comparable to ELSS have a five-year lock-in period.
3. Tax-free income
You may buy ELSS funds online or through an advisor. Either way, your investments will earn tax-free returns. The dividends on your ELSS investments and the maturity benefits are not taxable. The only other product that offers tax-free income is PPF. Other avenues like National Pension Scheme (NPS) and FDs are taxable on maturity at your tax slab rate. For ULIPs, if the premium exceeds 10% of the sum assured, the maturity benefits are taxable.
To ensure you do not want to face financial distress, you may opt to invest through a Systematic Investment Plan (SIP) in the ELSS plan. This allows you to buy ELSS funds online with a smaller amount that is regularly invested. It instills financial discipline without any liquidity crunches.
Before you invest in ELSS plans, you need to analyze your risk appetite. Furthermore, it is important you compare the performances of different funds to make an informed decision.
ELSS plans outscore all other investment avenues available under Section 80C of the IT Act. These investments provide higher returns, greater liquidity, and tax benefits. Their capability of earning higher tax-free returns over the long-term makes these the best option to build wealth and save taxes.