As the Financial Year 2020-21 is nearing its finish, lots of taxpayers would be in a final-minute rush to make tax-saving investments in order to reduce their tax outgo. However, ahead of you invest your tough-earned funds in any of the readily available investment alternatives, you have to take time out to examine and select the correct one based on your threat appetite, return expectations, liquidity and taxability of returns.
Let’s closely look at some of the preferred tax-saving investment alternatives readily available below Section 80C of the Income Tax Act:
Public Provident Fund (PPF)
Managed by the Government of India, PPF is one of the safest investment alternatives eligible for tax deduction below Section 80C. Both its principal and interest elements are backed by the sovereign assure. The interest price is reviewed each quarter by the Ministry of Finance based on the government bond yields. As the interest earned and the maturity quantity are totally tax-totally free, PPF presents one of the highest post-tax returns amongst all fixed revenue investment alternatives.
“While PPF has a long lock-in period of 15 years, it allows partial withdrawals once in a year starting from the 7th year of subscription, whereas premature closure is permitted after 5 years for treating life-threatening diseases of the account holder, spouse, dependent children or parents or for funding higher education of the account holder or his dependent children and in case of change in his residential status,” says Sahil Arora, Director, Paisabazaar.com.
Equity-Linked Savings Scheme (ELSS)
ELSS is mostly diversified equity mutual funds, with a lock-in period of 3 years. It is one of the shortest amongst all investment alternatives readily available below Section 80C. Being an equity fund, ELSS comes with the equivalent industry threat as other equity funds. However, the returns generated by ELSS funds outperform these of many fixed revenue investment alternatives below Section 80C by a wide margin more than the extended-term. ELSS comes below the ambit of LTCG tax on equities, which suggests that extended term capital gains (along with these from other equity merchandise) exceeding Rs 1 lakh in a economic year are taxable @10%.
Tax-Saver Fixed Deposits
Tax-saving FDs from the Post Office and banks score higher in terms of capital protection and certainty of return. However, the interest revenue gets taxed as per the applicable tax slab of the depositor. Although tax-saving FDs come with a lock-in period of 5 years, depositors can opt for quarterly or month-to-month interest spend-out alternatives or can select the reinvestment alternative exactly where the interest element is reinvested till the maturity of the FD.
National Pension System (NPS)
NPS is a industry-linked investment solution aimed at supplying post-retirement economic safety to its subscribers. While investments in NPS of up to Rs 1.5 lakh per economic year qualify for tax deduction below Section 80C, an added tax deduction of Rs 50,000 is readily available for NPS investments below Section 80CCD(1B) more than and above the deduction readily available below Section 80C.
Unit Linked Insurance Plan (ULIP)
ULIPs offer you the combined positive aspects of insurance coverage and investment. While a aspect of your premium is utilized for supplying your life cover, the remaining aspect is utilized for creating returns via investments in equities and/or debt instruments. ULIPs also have a longer lock-in period of 5 years and provide the facility to switch in between equity, debt or balanced alternatives based on your altering threat appetite, economic objectives and industry outlook.
The Budget 2021 has proposed to let tax exemption for maturity proceeds of ULIP getting annual premium up to Rs 2.5 lakh. However, “the amount received on death shall continue to remain exempt without any limit on the annual premium. The cap of Rs 2.5 lakh on the annual premium of ULIP shall be applicable only for the policies taken on or after 01.02.2021. Further, in order to provide parity, the non-exempt ULIP shall be provided the same concessional capital gains taxation regime as available to the mutual fund,” says Arora.
Sukanya Samridhdhi Yojana (SSY)
Launched in 2015, this government-backed scheme encourages investment for girl’s larger education and marriage. The account can be opened anytime from the birth of a girl kid till she reaches 10 years of age, with post workplace or authorized banks. The principal quantity qualifies for tax deduction below Section 80C and the interest earned is tax-totally free.
National Savings Certificate (NSC)
One of the most preferred compact investment alternatives is National Savings certificate (NSC), offered by the Postal Department. It’s a fixed investment scheme readily available with any post workplace, and is mostly aimed at encouraging compact and medium revenue folks to invest when saving tax. It includes a lock-in period of 5 years and the principal and interest each qualify for tax deduction below Section 80C (except interest received in the final year).