Discovering tax-saving investment options may not be as easy as it seems, because, along with tax benefits, you also need to find an ideal investment avenue that generates good returns and aligns with your long-term wealth creation objectives.
Section 80C provides a list of investment options under which you can claim a deduction of up to Rs. 1.5 lakhs. There are several investment options in Section 80C in which you can invest your money and save tax. So, let’s analyze the top investment options where most Indian investors invest their money by comparing them with a few parameters.
1. ELSS Mutual Fund
The first investment option under section 80C is ELSS Mutual Fund. ELSS Mutual Fund stands for Equity Linked Savings Scheme. This is an equity investment, which means at least 80% of your investment will be in the stock market.
Lock-in period: It has a lock-in period of 3 years, which is the shortest lock-in period compared to other investments under Section 80C.
Returns: ELSS Mutual Fund’s returns will depend on the market volatility, as it is subject to market risks. However, if we talk about historic returns, in the last 10 years, ELSS mutual funds as a category have given returns in the range of 13% to 15% on average.
Tax payable on returns: After maturity, if you withdraw your money and if your profits are above Rs. 1 lakh, you will have to pay LTCG which is long-term capital gains, i.e., tax at straight 10% on your profit amount.
Tax deduction: You can claim a maximum deduction of up to Rs. 1.5 lakhs under this scheme, making it a win-win investment option for medium to long-term investors.
2. National Pension System (NPS)
NPS is a government-introduced scheme through which you can invest in 4 asset classes, i.e., Equities, Corporate Debt, Government Bonds, and Alternate Investments (ECGA).
It requires a minimum investment of Rs. 500 in the tier 1 account and a minimum of Rs. 250 in the tier 2 account. However, it is important to note that in order to open a tier 2 account, you need to first have a tier 1 account.
Lock-in period: The lock-in period of NPS is one of the longest as compared to other investment options under Section 80C. The lock-in period is up to the age of your retirement which is set as 60 years. This means that if currently your age is 30 years, and you start investing in NPS, you can withdraw that money only after you complete 60 years.
Although there are some provisions in which you can withdraw your money before maturity under any medical emergency or job loss situation. But one drawback of NPS is that even after you attain maturity at the age of 60 years, you cannot withdraw 100% of your investment value. You can only withdraw up to 60% of the maturity amount. You will receive the remaining 40% in the form of a pension.
Returns: Depending on the period of your investment, you can expect returns of around 6% to 8%. And since it has a very long lock-in period, it is suitable for you, only if you have a long-term investment horizon.
Tax deductions: You can claim the Section 80C tax deductions only on your tier 1 investments. This means that your tier 2 account investments do not offer any tax benefits. Additionally, you can claim Rs. 50,000 under Section 80CCD (1B).
Tax payable on returns: You do not have to pay tax on the 60% of returns withdrawn during maturity. However, the remaining 40% is taxable as per your slab rate.
3. Public Provident Fund (PPF)
This too is a government-introduced investment scheme that focuses on your retirement. To invest in a PPF you can start with an amount as low as Rs. 500 and have a maximum investment of Rs. 1.5 lakhs in a year.
Returns: This is a fixed-income product which means you will receive a fixed rate of interest. The current interest rate on PPF is 7.1% per annum which is revised every quarter. Since it is a government-backed product, it is a risk-free investment option.
Lock-in period: Its lock-in period is of 15 years which you can extend for an additional 5 years during maturity. Hence, it is suitable for people with a long-term investment horizon.
Tax payable on returns: Your PPF maturity amount is completely exempt from tax.
4. Sukanya Samriddhi Yojana (SSY)
The next investment option is SSY which stands for Sukanya Samriddhi Yojana. This investment option is beneficial for people who want to invest in the financial future of their girl child to fulfill her goals and financially secure her future. SSY requires a minimum investment of Rs. 250 and a maximum of Rs. 1.5 lakhs in a year.
Returns: This is a fixed-income investment where you will receive a fixed rate of interest. The current rate of interest on SSY is 8% per annum which is revised every quarter.
Lock-in period: It has a lock-in period of 21 years from the age of investment of the girl child or until your daughter gets married
Tax deductions: Depending on the amount you invest in this scheme; you can claim a deduction under Section 80C.
Tax payable on returns: The SSY maturity amount is exempt from tax.
Note: One can invest in the SSY for only 2 girl children and the investment can be done only until the girl child reaches the age of 10 years. So, if you have a long-term horizon and are planning to secure your girl child’s financial future then SSY can be a great option for you.
5. National Savings Certificate (NSC)
This is a post office investment scheme which you will have to do through a post office.
Returns: Its current rate of interest is 7.7% per annum which revises every year.
Lock-in period: It has a lock-in period of 5 years.
Tax deductions: You can claim tax deductions on the interest you receive under section 80C.
Tax payable on returns: After the completion of the lock-in period, whatever interest you have earned will be taxed as per your tax slab. So, it is a suitable option for investors looking for tax-saving options having a medium to long-term horizon.
6. Tax Saving Fixed Deposit
Tax Saving Fixed Deposits are similar to a regular FD with just a few differences.
Returns: The rate of interest varies from bank to bank but on average, it is in the range of 5% to 7.5%.
Lock-in period: It has a 5-year lock-in period.
Tax deductions: You get a tax deduction under section 80C up to the amount of Rs. 1.5 lakhs.
Tax payable on returns: The interest that you earn in this scheme will be taxed as per your slab rate. If you are a low-risk investor with a medium to long-term horizon, you may consider investing in this scheme.
Conclusion:
Keep in mind that you can claim tax deductions under all these investments only if you opt for the old tax regime. However, if you are opting for the new tax regime, you will not be able to save on taxes by investing in any scheme under Section 80C.
