Best tax saving investment options in India

In an earlier post I had discussed some common tax saving investment options under section 80C of the Indian income tax act. However, like with most of the things, it often leaves users spoilt for choices – especially with different options with lot of seemingly good choices. Here I’ll highlight which are the best tax saving investment options in India under Section 80C & why do I think so.

With this I hope to share my take on what are the better investment options among these & hence should get higher priority in your scheme of things.

Best tax saving investment options in India

Before we begin, here is a snapshot of current rate of returns most of these investments offer. Please note that these rate of returns keep on getting revised periodically. This rate is usually correlated to the inflation rate in the country. However, the difference between the returns among these (fixed returns instruments) usually remain in similar range. So, I’ll assume that this will hold true in future too.

Returns provided by some tax saving investment options in India.

(as on 1st May 2019)

  • Provident Fund (PF) – 8.65% (Includes Voluntary Provident Fund – VPF) – Tax free in long run
  • Public Provident Fund (PPF) – 8% – Tax free
  • National Savings Certificate – NSC – 8% – Taxable
  • Tax saving Fixed Deposits – Most of the banks offer 6.25 – 7.5% rate of interest (Source) This may vary according to bank. This is taxable
  • Sukanya Samriddhi Yojna – 8.5% – Tax free
  • Senior Citizens Saving Schemes – 8.7% – Taxable
  • ELSS – (Stock) Market linked returns (good over last few years) – Long term capital gains tax, if applicable.
  • ULIP – Market linked returns – Taxable/ not taxable based upon certainĀ  conditions. (Details)
  • NPS – Market Linked returns – Partly tax free

Investments that can help you save taxes

Provident Fund (PF)

A good chunk of salaried people have PF deduction a part of salary. At 8.65% rate of interest is one of the highest among peers. In long run, returns are tax free too. (comparison includes traditional fixed deposits & returns you can typically expect from liquid/ debt funds). If your financial situation permits, you can top-up your PF contribution voluntarily, via voluntary provident fund – VPF (up to 100% of your basic pay).

One drawback is that if you are running your own business or employed in a small company not offering PF, you won’t be getting PF. However if you are in corporate or government/ PSU setup, where you are reasonably sure to stay in it for long term, contributing via VPF can be a good idea. It can form a good “debt” part of your portfolio.

Public Provident Fund (PPF)

PPF can be opened by people in India irrespective of the setup where they are employed in. While the interest rate is slightly lesser than PF (and the benefit of tax exemption being available over long run) it can be a good addition to debt part of your portfolio. In long run, PPF can help you money compound. Subsequently, as the corpus grows, the interest contribution can start becoming more than your own contribution.

In the trade off between a VPF and PPF – I would suggest go for a mix of both if possible. But if you are in a setup with PF contribution and plan to stay there for long, you can only opt for VPF only and not PPF.

Do note that you need to contribute to PPF every year else there can be some penalty. (this contribution amount can be as low as Rs. 500 or maximum limit of Rs. 150,000) Partial withdrawals are allowed after Year 7 & you have an option to close the account at maturity (15 years) or keep on extending it in blocks of 5 years.

Equity linked savings Scheme – ELSS

ELSS are a type of mutual fund & invest predominantly in equity markets. Over last few years most of the ELSS funds have given good returns (most of them have given >12% annualized returns over last 5 years) – You can see more on returns here. One more thing that works in favor of ELSS is a shorter lock-in period – 3 years.

However, if you leave tax saving out of question (say, you have already utilized the limit elsewhere) you may be better off investing in mutual funds, as they have no lock-in period. (Though you should ideally look at mutual funds as a long term investment!)

ELSS can be good addition to your portfolio if you have a good risk appetite and prefer to be invested in equity linked investments.

National Savings Certificate – NSC

It currently offers an interest rate of 8%. While this is at par with PPF (And not as good as PF), the returns are taxable. This is a huge drawback. Few things in its faour are – no investment limit & interest accrued is eligible for tax deduction. It may also be helpful if you thing you won’t be able to invest in something like PPF every year. However, there are better investment options than NSC for saving taxes & getting better returns.

Tax saving Fixed Deposits

Tax saving FDs usually offer lesser interest rate than PPF/ PF. (senior citizens get a higher rate of interest) And the interest earned is taxable too. So, there are better options than investing in tax saving FDs.

Unit Linked Insurance Plan – ULIP

While there are many admirers of ULIP, I think it is a complicated product. One is better off taking a term plan (life insurance) separately & investing in mutual funds separately. And for tax saving – well, it comes later, as there are already better options available for it.

Sukanya Samriddhi Yojna – SSY

It is an account which you can open in the name of your girl child (under 10 years). In terms of taxation it is EEE (Exempt Exempt Exempt) – initial deposit is eligible to tax deduction, interest earned is tax exempt and maturity amount is also tax exempt (similar to PPF).

While the rate of returns are good, understand that it is a tenured account and you need to anticipate if you’ll need the funds apart from time when withdrawal is permitted. 50% withdrawal is permitted at the age of 18 (for higher education) & maturity date is 21 years after opening of account.

Senior Citizen Saving Scheme (SCSS)

As the name indicates, only senior citizens are eligible to enroll for this. SCSS currently offers 8.7 percent rate of returns. While the returns are good, the interest earned is taxable. So, one can decide based upon their tax slabs & tax implications on returns.

National Pension Scheme (NPS)

In NPS, both your & employer’s contribution are eligible for deductions. Deductions are possible over and above Rs. 150,000 offered by Section 80C also (up to additional Rs. 50,000 via Section 80CCD, which is a sub-section). While government employees mandatory need to subscribe to NPS, it is optional for others.

The returns which NPS provide is dependent partly upon the pension fund returns (you can subscribe to one of the few available pension funds – who eventually invest in a mix of debt & equity).

NPS also has a high lock-in period and returns are partially taxable (60% of returns are tax free, and rest needs to be invested in an annuity, proceeds from which will be taxable at your tax slab). Premature (partial) withdrawals are taxable.

Expenses that can help you save taxes

  • Insurance premium payments – It’s highly recommended that you should get a term plan. But avoid buying insurance just to save taxes. There are better ways. Buy it because it helps you manage risk better.
  • Child’s education – Not something that requires a detailed analysis from tax saving perspective. Right?
  • Amount paid towards home loan principal repayment. – While you can claim this amount under Section 80C, I would suggest not to go for home loan just to save taxes. Have better reasons for taking a home loan, if you wish to. It may be an expensive way to save taxes. There might be better investment avenues, offering better returns, at least for “principal” component of saving taxes.
  • Stamp duty paid while purchasing a home (one time). – Claim a tax deduction if need be. Anyway, for most of us this may be a one time thing.

 

While, the above expenses can help you save taxes, tax saving shouldn’t be the main consideration. Rather, the benefits they offer should be the primary consideration. Tax saving can be a collateral benefit.

As long as you are utilizing the exemption limit, chase the investments that give maximum returns. No?

At the same time, if your financial situation permits, don’t look at the Rs. 150,000 limit as sacrosanct. You can evaluate these instruments as a means to get good returns and not just tax savings.

So, if your investment in accounts eligible for tax deduction looks something similar, no need to worry!

  • PF + VPF – Rs. 150,000
  • PPF – Rs.. 150,000
  • Kids’ education – Rs. 100,000
  • Life insrance premium = Rs. 20,000
  • ELSS – Rs. 50,00
  • Total – Rs. 470,000

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With this, I hope I have been able to outline the benefits of different investment avenues under Section 80C and how good or not-so-good they are.
Eventually, you need to do your own analysis and identify the mix (starting right from asset allocation) that works best for you.

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