Smart Tax-Saving Strategies: 7 Investment Options for Maximum Benefits
Tax planning is an important aspect of financial management, enabling individuals to lower their taxable income and also ensure their future. In India, various investment schemes under Section 80C of the Income Tax Act enable taxpayers to claim deductions of up to Rs.1.5 lakh per year. These schemes not only give tax relief but also the possibility of long-term wealth generation.
But it must be noted that these tax benefits of saving are available only under the Old Tax Regime. Knowing various investment options and their characteristics can assist in choosing the best option according to financial objectives, risk tolerance, and time horizon.
Considerations for Tax-Saving Investments
Before making a choice in a tax-saving investment, some considerations need to be kept in mind:
- Tolerance to Risk: Plans such as ELSS and NPS carry market risks but promise higher returns.
- Investment Goal: For those who want safer investment options, NSC and PPF offer security with assured returns.
- Lock-in Period: A few schemes have a longer maturity option, like PPF (15 years) and NPS (upto retirement), which must be considered before putting in the money.
7 Best Tax-Saving Investment Options
1. Equity Linked Savings Scheme (ELSS)
- Expected Returns: Above 15% (in the long term).
- Lock-in Period: 3 years.
ELSS Mutual Funds are both tax-saving and wealth-generating. ELSS investments are tax-deductible up to Rs.1.5 lakh under Section 80C. As this is a market-linked product, no returns can be assured, but they have consistently beaten the more conventional fixed income investments.
2. Public Provident Fund (PPF)
- Expected Returns: 7.1% per annum.
- Lock-in Period: 15 years.
PPF is a secured government-backed investment. The maturity value and interest earned are exempt from tax; hence, it is appropriate for conservative investors. It is eligible for a deduction of up to Rs. 1.5 lakh under the old tax regime.
3. National Pension System (NPS)
- Expected Returns: 9% to 12%.
- Lock-in Period: Till retirement.
NPS is a long-term retirement-oriented investment that provides an additional tax exemption of Rs.50,000 under Section 80CCD(1B), over and above the Rs.1.5 lakh deduction under Section 80C. This makes it a popular choice for those planning for financial security after retirement.
4. Sukanya Samriddhi Yojana (SSY)
- Expected Returns: 7.6% per annum
- Lock-in Period: 21 years or until the marriage of the daughter.
SSY is a scheme of the government aimed at encouraging savings for a girl child’s education and marriage. Investment under this scheme can be claimed as tax deductions under Section 80C, and returns are completely tax-exempt.
5. National Savings Certificate (NSC)
- Presumed Returns: 6.8% yearly
- Lock-in Period: 5 years
NSC is a safe investment for small and middle-class investors. The amount invested as principal is eligible for deduction under Section 80C, making it a safe bet for tax savings.
6. Senior Citizen Savings Scheme (SCSS)
- Assumed Returns: 7.4% per annum.
- Lock-in Period: 5 years (can be extended up to 3 years).
SCSS is tailor-made for elderly citizens, providing a greater rate of interest than fixed deposits. Nevertheless, more than Rs. 50,000 interest per annum attracts tax.
7. 5-Year Tax-Saving Fixed Deposit (FD)
- Assumed Returns: 5.5% to 7.75%.
- Lock-in Period: 5 years.
Tax-saving FDs are an ideal option for those seeking fixed returns with low risk. Although they offer tax deductions under Section 80C, the interest received is taxable, which must be factored in the assessment of returns.
Conclusion
It is important to choose the appropriate tax-saving investment for long-term financial security. Risk-takers will find ELSS and NPS more useful as they have a potential for high returns. However, PPF, NSC, and SCSS offer safety and assured returns, which make them ideal for risk-averse investors. It is important to select the right tax-saving choice so that the savings increase in an efficient manner while availing maximum tax benefits.
