Section 80C of the Income Tax Act allows a deduction up to a sum of Rs. 1.5 lakhs on certain tax saving investment options. These tax-saving investment plans include Life Insurance Premium, 5-Year Tax Deposits, Public Provident Fund, National Savings Certificate, and so on. This is the key reason Section 80C is a sought-after section when we talk about tax planning.
However, instead of investing in an ad hoc way, if you choose the tax-saving investment options as per your risk profile, it can prove to be more beneficial. It may even help you to achieve your financial goals in a better way.
In this article, we discuss 4 best tax saving investment options offering market-linked returns that can help you create long-term wealth.
1. Equity Linked Savings Schemes (ELSS)
Commonly known as Tax Saving Fund, ELSS is a diversified equity mutual fund offering tax-saving benefits. This tax-saving investment option has a mandatory lock-in period of 3 years. The minimum application amount is as little as Rs. 500 and there is no upper limit to the amount you can invest.
The investments can be made either in lumpsum or by SIPs (Systematic Investment Plans). SIPs are regarded as the better way of investing in ELSS as they provide the advantage of compounding and rupee cost averaging.
While selecting this tax saving investment scheme, look for funds which have a consistent performance record and follow robust investment processes. If you choose the right scheme, ELSS has the potential to offer attractive inflation-adjusted returns. The investment style could be value, growth or a combination of the two based on the investment mandate of the scheme.
2. Pension Funds
Pension funds offered by Mutual funds, are one of the preferred tax saving investment options in India. They are effective investment tools for retirement planning and tax planning. Most of the pension funds are hybrid in nature i.e. they invest in equity as well as debt. The returns on pension funds depend on the proportion in which the scheme invests in equity and debt. It also depends on how efficiently the scheme has been managed across the market conditions.
Pension funds have a 5 year lock-in period and an exit load which can extend up to retirement. At the vesting age, you can systematically redeem the units held in the folio/account by opting for a regular pension. This is the reason most people opt for pension funds for tax saving investment options in India.
3. Unit-linked Insurance Plans (ULIPs)
Typically, these tax saving investment options are insurance cum investment plans. They enable you to invest in equity and/or debt instruments. You can simply select the allocation option as offered by ULIPs. Fund options are classified as aggressive, moderate and conservative. Aggressive funds invest only in equity, moderate funds invest in a mix of equity and debt whereas conservative funds invest purely in debt instruments.
ULIPs not only offer investment returns that are market-linked but also provide insurance cover which is generally 10 times the insurance premium you pay. To enable you to track the performance of the fund, this tax saving investment option declares its Net Asset Value at regular intervals.
ULIPs come with a compulsory lock-in period of 5 years and also have a minimum premium paying term. The overall term of the policy differs from one product to the other. However, if you want to claim the tax benefit, the policy should remain active for a minimum of 5 years. In the case of eventualities, the fund value or the sum assured (whichever is higher) is paid to the beneficiary.
An important point to consider is while ULIPs may serve as a great tax saving investment option you must handle your investment and insurance needs separately. This helps you to pick the right investment instrument for long-term wealth creation and also have optimum insurance coverage.
4. National Pension System (NPS)
Erstwhile available only to the government employees, NPS is a trusted tax saving investment scheme which was introduced to the private sector in 2009. If you are between 18 years of age to 60 years and belong to the unorganised (private) sector you are eligible for NPS. The contributions towards this tax saving investment plan are voluntary.
You can invest in any of the following two accounts:
• Tier-I Account
This is a mandatory account where the minimum investment required is Rs. 500 per contribution and Rs. 1,000 per year. The account is frozen if you fail to pay the yearly minimum contribution. In order to unfreeze this account, you must contribute the total sum of contributions missed along with a penalty of Rs. 100 per year.
Under this account, premature withdrawals are not permitted before you attain the age of 60 years. However, they can be allowed only in the form of repayable advance if you have completed 15 years. In addition, such withdrawals are permitted only in case of emergency or critical illness. This is because the main aim of this account is to build a retirement corpus and buy a life annuity. This account can be operated anywhere in the country irrespective of the job location and employer.
• Tier-II Account
Unlike the Tier-I account, Tier-II account is a voluntary account. You first need to have a Tier-I account to open a Tier-II account. It can be opened with a minimum contribution of Rs. 1,000. From Tier-II account, you can withdraw as and when you wish to. The withdrawals do not attract a penalty of any sorts. So, this account serves just like your savings account.
There are two investment choices while investing money in NPS – Active or Auto. Under ‘Active', your money is invested in various asset classes. You can decide your asset allocation into the specific asset classes such as ECG. E stands for Equity and C denotes credit risk-bearing fixed income instruments other than government securities. G represents the central government and state government bonds.
Under ‘Auto’, money automatically gets invested according to your age profile. If you do not choose an option out of the two, the default option is always ‘Auto Choice’.
These are the best tax saving investment options that can be ideal for risk takers. ELSS is the most liquid option but to reap more benefits it is best to stay invested in it for at least 5 years. Pension Funds and NPS are good investment avenues for tax planning as well as retirement planning. As far as ULIPs are concerned, remember to deal with your investment and insurance needs separately. You can contact IndiaNivesh Ltd. if you need assistance with tax planning and investment guidance.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.