Tax planning is an integral part of financial planning. When you choose among the best savings schemes in India for tax saving, you can not only save taxes efficiently but also receive tax-free income. While choosing the right instrument among the best savings schemes in India, to save taxes, consider factors such as safety, liquidity, the tax treatment of the returns generated, and whether they fit into your overall financial plan.
All of us have a tendency to think about tax planning only when the financial year is ending. However, if you begin investing to save taxes early during the year, you can avoid making a hasty investment that does not fit into your financial plan just to avoid the tax trap. Most tax saving schemes offer benefits under Section 80C of the Income Tax Act.
However, if you assess the merits of each tax saving investment option with enough time in hand, you will find that each of these options differs on certain crucial parameters that can significantly alter your financial goals. Thus, prudent assessment of each option is highly recommended before you make the final choice. Here, we take you through best saving options in India to help you achieve your tax planning goals.
Equity Linked Savings Schemes (ELSS)
Though Equity Linked Savings Schemes or ELSS, are essentially diversified equity mutual funds, they rank high among the best savings schemes in India for tax purposes. Even though it is a mutual fund scheme, it offers benefits of tax saving investments under 80C of the Income Tax Act as well as the benefits of capital appreciation. One of the major reasons why ELSS scores high is because they offer the shortest lock-in period of three years as compared to other tax savings instruments that have a lock-in of 5 years or more.
Who is it for? - Young salaried investors who wish to save taxes and test the markets
You can invest in an ELSS through the SIP route. This means you deposit a small amount towards tax savings each month. Despite the new taxation norm which levies 10% tax on LTCG made on equity and equity related instruments, it does not affect small investors as 10% tax is levied only if LTCG is above Rs. 1 lakh. Small investors are unlikely to garner such gains in a short time frame.
Public Provident Fund
This is one of the most popular tax savings schemes in India. PPF is a 15-year scheme, where both the principal and interest earned remain tax-free in the hands of investors. The biggest advantage of a PPF account is that it carries a sovereign guarantee that currently offers returns at the rate of 7.8% per annum, which translates into double-digit returns (for an individual in the highest income bracket of 30.9%). The minimum amount required to maintain an active PPF account is Rs. 500 and you can deposit a maximum of Rs. 1.5 lakh in a PPF account in a financial year. To invest in PPF scheme it is required to open a PF account. Like before whenever you will change your employer it will not be required to transfer your account. You will be provided a UAN (Universal Account Number) which can track your multiple IDs allocated by your employer. To know what is uan number? in detail, you must read about it.
Who is it for? - PPF is best suited to investors who have a long-term investment horizon and do not want volatility in their returns, associated with investments in equities, as an asset class
National Savings Certificate
Investors interested in the best saving schemes in India are often found asking is it good to invest in NSC?. NSC or National Savings Certificate is a fixed income investment scheme that you can open with any post office. It is essentially, a savings certificate with a sovereign guarantee and low risk attached to it. NSC comes with the option to choose between 2 maturity periods - 5 years and 10 years. Investments up to Rs. 1.5 lakhs are tax-exempt under Section 80C of the Income Tax Act. Currently, the NSC interest rate for 2018 is 7.6% per annum and offers the guarantee of capital protection and interest income.
While an NSC is very similar to PPF in structure, the essential difference is that the interest income is not tax-free in the hands of the investor. However, by investing in NSC you can enjoy a regular income and can begin investing with an amount as less as Rs. 100 (or its multiples). The interest gets compounded and reinvested in the principal by default. You can, therefore, enjoy the benefits of compounding over the long term. The other advantage of investing in NSC is that it is accepted as collateral for secured loans.
Who is it for? - Small to medium income investors who are looking at creating an investment portfolio while saving taxes in a secure and low-risk product
There are other tax-saving options such as tax savings fixed deposits, National Pension Scheme and Senior Citizen Savings Scheme that you can opt for depending upon your risk appetite and time horizon. Now that you know the best among the savings schemes in India, consider making an investment towards tax saving at the beginning of the ensuing fiscal year to avoid last-minute hurrying to save taxes.