Tax Saving and Section 80C: Our take on the most popular options
Last minute tax planning can lead to bad decisions- ones that can lock up your money for years or make your money grow at snail’s pace. Here are 5 popular options (and 1 not-so-popular option we want you to know more about) and when should you choose them.
1. ELSS Funds (Equity Linked Saving Scheme):
ELSS funds are mutual funds that invest in equities. Unlike the regular mutual funds, they have a lock-in period of 3 years which is lower than other 80C investment options available. The returns are not guaranteed but historically they have given double digit returns.
Our Take: Ideal for people who don’t want to lock-in their returns for long periods and are willing to take a little bit of risk for higher returns. In addition to tax saving, this scheme is great for wealth creation.
2. PPF (Public Provident Fund)
PPF investments earn interest at a rate announced every year – currently 7.9%.The duration of lock-in is 15 years, extendable by 5 years at a time. Withdrawal is not allowed before 15 years.
Our Take: Ideal for people with low risk appetite, looking for certain returns. The returns are tax-free. This is a good way to accumulate savings over the long-term.
3. Five Year Bank FD
This is a variant of the regular Bank FD with a 5 year lock-in. They offer slightly higher interest rates compared to normal FDs (0.25-0.5% higher). They do not offer liquidity option- even premature withdrawal with penalty is not possible unlike a regular FD. The interest is accumulated and not paid out annually. It is fully-taxable at the end of five years.
Our Take: Not recommended especially for people in higher tax brackets since the post-tax returns are much lower than other tax saving investment options.
4. NSC (National Savings Certificate)
These are similar to Fixed Deposits. The interest rate varies each year. The current rate is 8% for 5 year lock-in NSCs.The interest accumulated is fully taxable. Interest amount is compounded and not paid out annually.
Our Take: Though the NSC has a lower lock-in than a PPF and scores well when it comes to the risk parameter, it is not recommended especially for people in higher tax brackets since the post-tax returns are much lower than other tax saving investment options.
5. Insurance Plans
There are two kinds of insurance plans- life insurance and endowment plans. Life insurance is something that everyone with a dependent must have whereas endowment plans are a hybrid between insurance and investment which offer insurance cover along with some money back options.
Our Take: Buying term insurance is a good option since life cover is a necessity. However, endowment plans are not recommended because of their complex cost structures. The need for insurance should not be mixed with the goal to invest and grow your money.
6. National Pension Scheme (NPS)
NPS is a low cost, tax-efficient and flexible retirement savings solution. You can choose between different combinations of equity and debt for your investment. It, also, gives you the flexibility to move from one combination to another as well as the flexibility to move from one fund manager to another a certain number of times each year.
Our Take: NPS is a great option for people who want to save tax on an additional Rs.50,000 under Sec 80 CCD(1) over and above Rs.1,50,000 under Sec 80 C.
