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As we come close to the return filing due date every year we are all compelled to think of various tax saving schemes. We start comparing various tax saving investment options. There are multiple opportunities to reduce your tax burden, all you have to do is smart tax planning and investing.
Tax Saving Investment Options under Section 80C:
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Equity Linked Savings Scheme (ELSS)- Simply put, Equity Linked Savings Scheme (ELSS) is a type of diversified equity mutual fund investment eligible for tax-exemption under section 80C of the Income Tax Act, 1961 and offers the dual-benefit of tax-savings and capital appreciation over long-term. Going by its name ELSS is an equity-linked saving scheme that invests in equity-oriented products and comes with the lowest lock-in period of 3-years compared to other tax-saving investment options eligible for tax exemption of up to Rs. 1.5 lakh under section 80C, IT Act, 1961.
As the avenue, majorly invest in equity-based products, the returns are based on market performance. Despite this, ELSS has offered returns ranging 15-18 per cent and considered as one of the best tax-savings investment options when it comes to tax-savings and capital appreciation.
Let us say, your gross total income is Rs. 10.5 lakh. On claiming a deduction of Rs. 1.5 lakh under section 80C, your net taxable income is reduced to Rs. 9 lakh. This means investing in ELSS can bring down your tax liability by Rs. 46,350. - Public Provident Fund (PPF) - Public Provident Fund (PPF) is a tax-saving investment scheme backed by Government of India eligible for tax-exemption of up to Rs. 1,50,000 under Section 80C, IT Act, 1961. The scheme has a lock-in period of 15 years and has a moderately attractive interest rate ranging from 8-10 per cent. The returns in PPFs are fully exempted from tax.
Investors who had invested in PPF schemes can get the facilities such as loan, extension and withdrawal of account. - National Pension System (NPS)- It is a tax-saving investment avenue allows the citizens – resident or non-resident to enrol in the NPS investment cum pension scheme to contribute for retirement. However, to do this a citizen should be between 18 and 60 years of age. National Pension System allows investors to take the tax benefit of up to Rs. 1,50,000 under section 80C Income Tax Act, 1961.
The NPS scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA) and comes with the lock-in period of till retirement. - National Savings Certificate (NSC)- Similar to ELSS, NPS, and PPF, the National Savings Certificate (NSC) is another tax-saving investment option launched by the Government of India. It is a fixed income investment option that encourages men and women – especially, small to mid-cap investors who are planning to build wealth while saving on income taxes.
The NSC is a low-risk investment avenue that can be purchased through the nearest post office. The scheme offers fixed returns of 8 per cent. - Unit Linked Insurance Plans (ULIP)- Unit-linked insurance plan is a tax-saving investment option with a combination of investment and insurance. It provides the benefit of tax-saving, capital appreciation, and life cover in one scheme. Under the ULIP scheme, one part of fund puts towards life insurance and rest into equity, debt, or both assets and matches with your goals like retirement planning, children’s education, etc.
The ULIPs are eligible for providing tax exemption of up to Rs. 1,50,000 under section 80C, IT Act, 1961. - Tax-Saving fixed deposits- Tax-saving fixed deposits are a type of fixed-deposit scheme, by investing in which, an investor can claim a tax deduction of up to Rs. 1,50,000 under section 80C of the Income Tax Act, 1961. It is like a regular fixed deposit but comes with a lock-in period of 5 years and offer returns ranging 6.50-8.25 per cent.
Tax saving fixed deposit is one of the safest investment instruments which do not affect by the market volatility like in ELSS funds. However, the interest earned on maturity is taxable. - Employee Provident Fund (EPF)- The EPF is a tax-saving retirement benefits scheme which is maintained and overseen by the Employees Provident Fund Organization (EPFO) whereby the investor can save a fraction of his/her monthly salary for retirement corpus. The EPF is eligible for tax exemption of up to Rs. 1,50,000 under section 80C Income Tax Act, 1961.
How to choose the best tax saving option?
It is clear that tax-saving is one of the cornerstones of effective money management. However, it won’t benefit you much if your tax-saving investments aren’t optimal. Hence, it is important to consider a few things while judging the value of tax-saving investment option.
Here, we’ve listed some important factors that can help you in choosing the best tax-saving investment option.
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Returns – If it comes to check the worthiness of any tax-saving investment avenue, the ‘Returns’ is the most crucial factor that you need to consider. The primary goal of any investment is to receive ‘returns’ over a course of time, which should meet your goals and needs. And since returns are tied with risks, a high return investment entails high risk. Hence, one should consider his/her risk appetite before proceeding. There are various tax-saving investment options that offer high returns compared to others. For instance, ELSS funds have offered high-returns ranging 15-18 per cent which is way higher than other tax-saving investment avenues like FDs, PPFs, NPS, and NSCs. In the context of risk, ELSS has high risk-profile since it majorly invests in the equity-oriented products. So, compare the past returns and risk profile of different tax-saving investment avenues and decide which suits your needs and goals.
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Investment Goals – If your goal is to get tax-benefits and high-returns over a long-term period for children’s education or retirement then you need to choose a tax-saving investment option that can give you the benefit in paying taxes and help you build wealth over long-term. ELSS funds is a scheme that is eligible for tax exemption of up to Rs. 1,50,000 and offer high returns than any other tax-saving investment option. It is because the ELSS invest capital in equity-oriented products and entails for high-risk. As it is an equity-based scheme, the returns are market-linked. But, based on past performances, the ELSS has succeeded in giving higher returns than any other tax-saving investment option under Section 80C. But, if your risk appetite is less and only looking forward to tax-benefits then you can opt for other tax-saving investment options that offer low but ‘assured’ returns.
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Tax Benefits – It is important to check, if the amount that you take home at maturity is tax-free or not. For instance, the interests earned on the maturity of ELSS and ULIP are entirely tax-free. If the investment option you pick provides tax-free returns then it will be more rewarding. The only trade-off would be the lock-in period. Still, it would be better to invest as long as possible to receive better returns.
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Liquidity – Before you decide the investment avenue, it is important you check for the liquidity level. High liquidity will help you to convert your investment into cash when the need arises. Every tax-saving investment has a lock-in period. For instance, ELSS scheme comes with the shortest mandatory lock-in period of 3 years while NPS scheme has the lock-in period of till retirement. Similarly, every tax-saving investment option has its own mandatory lock-in period, within that period, withdrawing money from your investment will not be possible, even if there is a premature withdrawal facility, it will be at a penalty cost.
Why Is ELSS the Best Tax-Saving Option?
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ELSS are tax saving mutual funds that majorly invest in the equity markets. Since their returns are linked to market performance, they can provide annualized returns as good as 12% and above in the long run. While other Section 80C products only provides around 9% annualised returns. Thus, they beat all other asset classes by a huge margin.
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All the investments under Section 80C come with a mandatory lock-in period. The lock-in period for ELSS is just 3 years, which is the shortest in comparison to all other Section 80C investments. Other investment options like National Pension Scheme have a lock-in period until your retirement, PPF has a lock-in period of 15 years and other products like National Savings Certificate, Unit Linked Insurance Plans, and tax-saving fixed deposits have a 5-year lock-in period.
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Most of the investment instruments under Section 80C have government backing, and hence they are safe. But, the disadvantage is that they offer lower returns which may not beat inflation. On the other hand, equity funds are known to beat inflation and create wealth in the long run.
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Another advantage of investing in ELSS is that it gives you an option to start SIPs of a specific amount in these funds. The minimum investment amount can be as low as Rs. 500. Investing in small amounts takes away the stress of paying in bulk. Moreover, it also helps bring in financial discipline.
To conclude, ELSS is one of the investment tool among other section 80C asset classes in terms of tax benefits, returns and liquidity. It can definitely be a good; bet if you are looking to create wealth.
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