scorecardresearch5 best tax saving instruments and their returns

5 best tax saving instruments and their returns

Updated: 16 Dec 2021, 09:46 AM IST
TL;DR.

Tax saving is an important tool of investment. This article concentrates on the top 5 tax saving instruments, their features, and the returns they offer.

This article concentrates on the top 5 tax saving instruments, their features, and the returns they offer.

This article concentrates on the top 5 tax saving instruments, their features, and the returns they offer.

For a number of investors, saving tax is the main aim of investment. Tax planning not only helps in saving tax but also increases your income. There are a number of tools that can help people save taxes as well as create wealth.

Tax saving instruments are an integral part of any portfolio and there are many such instruments available to be chosen from.

Under Section 80c of the Income Tax Act, various such instruments like PPF, ELSS, etc can be used to claim tax deductions of up to 1.5 lakh per financial year.

In this article, we will look at 5 tax-saving instruments, their basic features, and the kind of returns they offer.

ELSS

ELSS is a type of mutual fund that is specially designed to save tax. It is more favored with investors who have a high-risk appetite since the majority of the fund is invested in stocks and is prone to market volatility. However, in the long term, it has proven to be a good tool for wealth creation.

It has the smallest lock-in period among tax-saving instruments and provides one of the best returns. An individual cannot withdraw from the ELSS fund for this period. Once it is complete you can decide to continue investing or withdraw depending on your investment needs. In a long-term scenario, it can give returns of around 20 percent as well, which is higher than any other tax saving instrument but it also has a higher risk than others.

It is eligible for tax deductions up to 1.5 lakh under Section 80C of the Income Tax Act, 1961 but if the interest earned is over 1 lakh, then it is taxable at the long-term capital gains tax rate which is 10 percent at the time of withdrawal.

NPS

The national pension scheme is another profitable form of investment if you want to save more cash. Under the new Section 80CCD (1B), an investment of up to 50,000 in a financial year is eligible for an additional tax deduction.

This is over the 1.5 lakh investment limit in Section 80C. NPS generally offers interest rates between 9-12 percent making it more lucrative than FDs. Investing the extra money in NPS can give you a decent windfall during retirement.

The only drawback is that you cannot withdraw the money before turning 60 since the main aim of this scheme is retirement savings.

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5 best tax saving instruments and their returns

PPF

PPF is a long-term fixed-income scheme that is backed by the government. It is one of the safest forms of investment since it has the guarantee of the government and gives assured returns. It is not linked to any market fluctuations. The interest rate is set by the government and the investor receives returns on the basis of that. It is currently set at 7.1 percent.

It has a lock-in period of 15 years, which is also one of the major drawbacks of PPF. However, partial withdrawals are allowed after 7 years while after 5 years, you can close the account in case of an emergency.

It is eligible for tax deductions up to 1.5 lakh under Section 80C of the Income Tax Act, 1961. The interest earned on PPF is also completely free. Since the interest is prefixed for a specific time, PPF enjoys a sovereign guarantee by the government. It is completely risk-free and despite any negative trends, the principal, as well as the interest amount, are guaranteed.

ULIP

Unit-linked insurance plans are also one of the best tax-saving investments under Section 80C. It gives tax benefits on both investment and interest amounts.

It is a combination of insurance and investment where the insurance firm uses a portion of your investment for life insurance cover and invests the remaining in a fund. The investor can choose if he wants to invest in equity or debt funds under ULIP depending on his/her risk appetite. You can also switch between the two.

It has a lock-in period of 5 years but is generally advised to invest for 10-15 years. The portion which goes towards the investment part of this scheme is entitled to tax redemption of Rs. 1.5 Lakh, along with 10 percent of the total premium (provided the value is less than Rs. 1.5 Lakh). It is also one of the high-risk tax-saving instruments like ELSS and its returns vary depending on the fund you choose.

Fixed Deposit

It is an investment instrument offered by banks and NBFCs which gives you a predetermined rate of return for a specified period of time. Though the rates are not very high, it's better than what your savings account offers. In a fixed deposit, you can fix your money for a tenure of as low as 7 days to as high as 10 years depending on the time you have.

Interest rates in an FD vary depending on the tenure. You get a higher rate for a longer tenure. This is also a risk-free investment and despite the state of the economy or markets, the principal, as well as the return amount, is almost guaranteed. FDs opened through banks are safer than FDs opened throughBFCs, however, the latter provides a better rate of return.

FDs can only act as tax-saving instruments if the money has been fixed for at least 5 years. 1.5 lakh per financial year can be deducted under Section 80C for a 5 year FD. One must note that it does not provide tax benefits for all five years, just the year it started. Also, the interest earned through FDs is added to your taxable income and taxed as per your IT slab.

These are the top 5 tax-saving instruments that provide good benefits as well as decent returns. However, apart from these, you can also invest in schemes like National Savings Certificate, Sukanya Samriddhi Yojana, Senior Citizen Saving Scheme, Life insurance, etc under section 80C to save tax.

First Published: 16 Dec 2021, 09:46 AM IST