As the new financial year kicks into its second month, it’s time to look at your tax-saving options (because really, that’s always better than remembering about it only when your office sends off an e-mail saying they want investment details). Section 80C of the Income-tax Act allows you to save upto Rs 1,50,000 in a year by investing it in eligible investments. And this is where a lot of people make a mistake, in thinking of this as purely a tax-saving exercise, rather than as a tool for long-term wealth-building. By putting their money into instruments that provide low returns, a lot of us end up with low-yielding instruments and have little left to actually invest after this amount is used up.
So let us look at the options for investment under section 80C (other than Employee Pension Fund, which is automatically deducted and you have no control over) and assess whether they also work for long-term wealth creation:
Equity Linked Saving Schemes (ELSS):
There are investments into specifically designated schemes of Mutual Funds. The investment can be a lump-sum or spread out in instalments throughout the year. There is a 3-year lock-in period. As they are equity-linked, the returns are not guaranteed, however in the long term, equities will give a better return than other investments in a stable economy. Moreover, as and when the investment is sold (after the 3 year period), the returns are tax-free under present law.
Public Provident Fund (PPF) / Voluntary Provident Fund (VPF)
After ELSS, this should be your preferred mode of tax saving. The guaranteed return is usually at least 1 percent higher than the going Fixed Deposit rate, and PPF is a good way to ensure small savings. You can invest in lumpsum or spread it through the year with minimum yearly contribution as small as Rs 500 and maximum at Rs 150,000. The only downside is that a PPF account cannot be withdrawn from (except in special circumstances) for 15 years from when it is first opened. Here too, the interest is tax-free.
VPF is an investment over and above the mandatory EPF deduction that you can opt for. It has the same benefits as normal Provident Fund, but is also subject to the same restrictions on withdrawal.
5-year Bank Fixed Deposits
Designated 80C Fixed deposits are offered with a lock-in period of 5 years and interest rates as per the going rate. While the rates are quite low presently, for those who do not want to bear the risk of ELSS investment, this may still be a good option. Interest remains taxable, though.
National Savings Certificate (NSC)
NSC is an option to invest at your local post office, with the interest rate notified by the Government of India from quarter to quarter. The lock-in period varies from 5 to 10 years and interest is taxable. On the whole. NSC is no longer a particularly attractive mode of tax-saving investment.
Life Insurance premium plans
Contribution to premium of a Life Insurance Plan is also eligible under section 80C. In order to function as a wealth-creation tool, however, one has to invest in endowment plans, which have a low yield compared to PPF and ELSS. On the whole, we suggest sticking to term plans for Life Insurance and allocating the rest of your tax-saving budget to other modes of investment.
Other options to save tax like Pension funds, NPS, annuity plans and so on are not really oriented towards Wealth Creation, and hence we shall not go in-depth about them.
For an individual, which investment is the best depends on your risk profile and capacity. While ELSS is the preferred and recommended mode by all investment advisors, it does have the risk attached to it. On the whole, a judicious balance between ELSS, PPF and the Bank FD would make for a good tax-saving plus wealth creation portfolio.
