TAX SAVING INVESTMENT OPTIONS UNDER 80C – ELSS TAX SAVING MIGHT BE THE SOLUTION

Equity Linked Savings Scheme (ELSS)

Simply put, Equity Linked Savings Scheme (ELSS) is a type of diversified equity mutual fund eligible for tax-exemption under section 80C of the Income Tax Act, 1961 and offers the dual-benefit of tax-savings and capital appreciation over the long-term. Going by its name ELSS is an equity-linked saving scheme that invests in equity-oriented products and comes with the lowest lock-in period of 3-years compared to other tax-saving investment options eligible for tax exemption of up to Rs. 1.5 lakh under section 80C, IT Act, 1961.

As the avenue, majorly invest in equity-based products, the returns are based on market performance. Despite this, ELSS has offered returns ranging 15-18 percent and considered one of the best tax-savings investment options when it comes to tax-savings and capital appreciation.

Public Provident Fund (PPF)

Public Provident Fund (PPF) is a tax-saving investment scheme backed by the Government of India eligible for tax-exemption of up to Rs. 1,50,000 under Section 80C, IT Act, 1961. The scheme has a lock-in period of 15 years and has a moderately attractive interest rate ranging from 8-10 percent. The returns in PPFs are fully exempted from tax.

Investors who had invested in PPF schemes can get the facilities such as loan, extension, and withdrawal of account.

National Pension System (NPS)

It is a tax-saving investment avenue allows the citizens – resident or non-resident to enroll in the NPS investment cum pension scheme to contribute for retirement. However, to do this a citizen should be between 18 and 60 years of age. National Pension System allows investors to take the tax benefit of up to Rs. 1,50,000 under section 80C Income Tax Act, 1961.

The NPS scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA) and comes with the lock-in period of till retirement.

National Savings Certificate (NSC)

Similar to ELSS, NPS, and PPF, the National Savings Certificate (NSC) is another tax-saving investment option launched by the Government of India. It is a fixed income investment option that encourages men and women – especially, small to mid-cap investors who are planning to build wealth while saving on income taxes.

The NSC is a low-risk investment avenue that can be purchased through the nearest post office. The scheme offers fixed returns of 8 percent.

Unit-Linked Insurance Plans (ULIPs)

A unit-linked insurance plan is a tax-saving investment option with a combination of investment and insurance. It provides the benefit of tax-saving, capital appreciation, and life cover in one scheme. Under the ULIP scheme, one part of fund puts towards life insurance and rest into equity funds, debt funds, or both assets and matches with your goals like retirement planning, children’s education, etc.

The ULIPs are eligible for providing tax exemption of up to Rs. 1,50,000 under section 80C, IT Act, 1961.

Tax Saving Fixed Deposits

Tax-saving fixed deposits are a type of fixed-deposit scheme, by investing in which, an investor can claim a tax deduction of up to Rs. 1,50,000 under section 80C of the Income Tax Act, 1961. It is like a regular fixed deposit but comes with a lock-in period of 5 years and offer returns ranging from 6.50-8.25 percent.

Tax saving fixed deposit is one of the safest investment instruments which do not affect by the market volatility like in ELSS fund. However, the interest earned on maturity is taxable.

Employee Provident Fund (EPF)

The EPF is a tax-saving retirement benefits scheme which is maintained and overseen by the Employees Provident Fund Organization (EPFO) whereby the investor can save a fraction of his/her monthly salary for retirement corpus. The EPF is eligible for tax exemption of up to Rs. 1,50,000 under section 80C Income Tax Act, 1961.

How to Choose the Best Tax Savings Options?

It is clear that tax-saving investments are one of the cornerstones of effective money management. However, it won’t benefit you much if your tax-saving investments aren’t optimal. Hence, it is important to consider a few things while judging the value of a tax-saving investment option.

Here, we’ve listed some important factors that can help you in choosing the best tax-saving investment option.

·         Returns – If it comes to check the worthiness of any tax-saving investment avenue, the ‘Returns’ is the most crucial factor that you need to consider. The primary goal of any investment is to receive ‘returns’ over a course of time, which should meet your goals and needs. And since returns are tied with risks, a high return investment entails high risk. Hence, one should consider his/her risk appetite before proceeding. There are various tax-saving investment options that offer high returns compared to others. For instance, ELSS funds have offered high-returns ranging from 15-18 percent which is way higher than other tax-saving investment avenues like FDs, PPFs, NPS, and NSCs. In the context of risk, ELSS has high risk-profile since it majorly invests in the equity-oriented products. So, compare the past returns and risk profile of different tax-saving investment avenues and decide which suits your needs and goals.

·         Liquidity – Before you decide the investment avenue, it is important you check for the liquidity level. High liquidity will help you to convert your investment into cash when the need arises. Every tax-saving investment has a lock-in period. For instance, ELSS scheme comes with the shortest mandatory lock-in period of 3 years while the NPS scheme has the lock-in period of till retirement. Similarly, every tax-saving investment option has its own mandatory lock-in period, within that period, withdrawing money from your investment will not be possible, even if there is a premature withdrawal facility, it will be at a penalty cost.

·         Tax Benefits – It is important to check if the amount that you take home at maturity is tax-free or not. For instance, the interests earned on the maturity of ELSS and ULIP are entirely tax-free. If the investment option you pick provides tax-free returns then it will be more rewarding. The only trade-off would be the lock-in period. Still, it would be better to invest as long as possible to receive better returns.

·         Investment Goals – If your goal is to get tax-benefits and high-returns over a long-term period for children’s education or retirement then you need to choose a tax-saving investment option that can give you the benefit in paying taxes and help you build wealth over long-term. ELSS funds is a scheme that is eligible for tax exemption of up to Rs. 1,50,000 and offer high returns than any other tax-saving investment option. It is because the ELSS invest capital in equity-oriented products and entails for high-risk. As it is an equity-based scheme, the returns are market-linked. But, based on past performances, the ELSS has succeeded in giving higher returns than any other tax-saving investment option under Section 80C. But, if your risk appetite is less and only looking forward to tax-benefits then you can opt for other tax-saving investment options that offer low but ‘assured’ returns.

Summary:

When the government of a country imposes taxes on its citizens, it is simply because they need their country’s citizens to pay those taxes. And it is also important for the citizens to fulfill the financial obligation of tax-paying for the development of the country. Unfortunately, not all of us think this way! Everybody desires to earn money and a lot of it, but not to pay tax. It has often seen that citizens avoid paying taxes in order to do more savings on their end to accomplish future financial goals, sometimes – illegally!  As it is essential to pay taxes, the government devised ways for citizens to save on their taxes and simultaneously build wealth overtime via conceiving various tax-saving investment schemes.  

These investment schemes provide various tax exemptions under the Income Tax Act and allow people to save their taxes and benefit from tax-saving schemes and plans offered by the government. The Equity Linked Savings Scheme (ELSS), National Pension System (NPS), Public Provident Fund (PPF), National Savings Certificate (NSC), Life Insurance, Unit-Linked Insurance Plans (ULIPs), and Tax Saving Fixed Deposits are some of the tax-saving investment schemes that come under Section 80C of Income Tax Act, 1961. These investment avenues offer a tax exemption of up to Rs. 1,50,000 under Section 80C of IT Act benefiting investors in tax-saving and capital appreciation.

With such facilities, the ‘tax savings’ is no longer just tax savings, but has been replaced with tax planning. However, we often keep the selection of tax-saving investment schemes until the end of the financial year. Instead of waiting till the last moment, it would be best to do it at the beginning of the financial year and spread your investments in a manner that it can use the 80C limit for tax-saving and make your investments to multiply over a long-term time. But, before you take such a step, it is also important to choose the best tax-saving investment option to efficiently carry out your tax-saving plan.

When it comes to the selection of tax-saving investment avenue, it is important to consider your risk appetite, financial goals, and liquidity. Also, it is important to be aware of how returns will be taxed. If the returns are taxable, so what’s the scope to create wealth over a long-term period? Although there are plenty of tax-saving investment options available in the market, people often get confused in deciding which plan suits them. In order to choose the right tax-saving investment option, it is recommended to compare all the tax-saving investment options with each other in terms of their returns percentage, risk profile, lock-in period, and safety level.

Many taxpayers opt for ELSS funds as these have the shortest lock-in period among other tax-saving investment options available under Section 80C. ELSS funds have the 3-years of mandatory lock-in period giving the exit window to investors in sudden emergencies. However, that is not the only reason to opt for ELSS funds. Of course, these funds have the shortest lock-in period but what makes it more compelling is the usage of invested capital in equity-oriented products. Probably, you know that equities have offered higher returns than any other asset class over a long period. With the tax-saving benefit, the ELSS funds also manage to build investors’ wealth over the long-term period. So, if your goal is to save on taxes and build wealth over long-time then ELSS might be the best solution.

Nevertheless, it would recommendable to explore other tax-saving investment options and select the one which suits you.