ELSS, NPS, insurance: Returns and risks of different tax saving optionshttps://indianexpress.com/article/business/banking-and-finance/returns-risks-tax-saving-options-5641463/

ELSS, NPS, insurance: Returns and risks of different tax saving options

Here’s a ready reckoner of sorts on some of the prominent 80C tax-saving investment options to help you make informed financial decisions and avoid costly mistakes.

Man submitting income tax returns
Representational image. (Express photo by Sumit Malhotra)

Tax saving season is here, and seeking deductions of up to Rs. 150,000 under section 80C remains possibly the most popular tax-saving avenue for taxpayers. While many will be tempted to make last-minute investments to reduce their tax liability under 80C, be mindful to avoid hasty investment decisions that may turn out to be counterproductive to your financial goals.

Here’s a ready reckoner of sorts on some of the prominent 80C tax-saving investment options to help you make informed financial decisions and avoid costly mistakes.

1. Equity-Linked Savings Scheme (ELSS)

ELSS are diversified equity mutual funds which are eligible for 80C tax deductions of up to Rs. 1.5 lakh. They come with a lock-in period of 3 years, which is the lowest when compared to other 80C tax saving options, and can garner good returns. However, Long Term Capital Gains (LTCG) over Rs. 1 lakh are taxed at 10.4 per cent post Budget 2018.

What are the returns? The average 1-year, 3-years, 5-years and 10-years returns on ELSS funds have been 10.94 per cent, 8.41 per cent, 18.24 per cent and 11.95 per cent respectively, according to CRISL AMFI ELSS Fund Performance Index (as of March 28, 2018).

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What are the risks? Moderate to high risk due to their exposure to stock markets.

What are the key things to keep in mind? Best to invest through SIPs. Lowest lock-in period of 3 years can be advantageous, but better to stay invested for a longer term.

2. Public Provident Fund (PPF)

PPF is a popular long-term saving-plus-investment option which is also eligible for 80C tax deductions up to Rs. 1.5 lakh a year. PPF has a minimum tenure of 15 years, with a facility to extend the tenure, and PPF accounts can be opened at any post office, nationalised bank or with certain private banks.

What are the returns? The current interest rate is 8% (for January to March 2019 quarter) which is compounded annually.

What are the risks? No risk as returns are guaranteed by the central government.

What are the key things to keep in mind? Super safe debt investment option with liquidity being the only major downside.

3. Term Insurance

Term insurance is one of the most popular tax saving schemes as premiums up to Rs 1.5 lakh are eligible for tax deductions under section 80C.

What are the risks and returns? Risks and returns do not apply as conventional term insurance is not an investment.

What are the key things to keep in mind? Life insurance is essential for everyone with dependents, and one should look at total coverage amounting to 10x to 20x his/her annual income. That being said, coverage requirement, and not tax saving, should be the primary consideration while choosing a life insurance policy.

4. Sukanya Samriddhi Yojana (SSY)

Parents with girl children younger than 10 years can invest up to Rs 1.5 lakh every year (minimum deposit of Rs. 250) under SSY and get tax deductions under section 80C. An SSY account can be opened in any post office or at particular branches of participating banks and lasts for 21 years from the date of opening, or till the marriage of the girl after she turns 18. Partial withdrawal of 50 per cent is allowed for the girl’s higher education after she completes 18 years.

What are the risks and rewards? There’s no risk as SSY comes with a sovereign guarantee. The current rate of return is 8.50% and the returns are completely tax-free on maturity.

What are the key things to keep in mind? This is a highly tax-efficient and safe debt investment instrument which comes with a clear purpose of safeguarding the future of girl children. Lack of liquidity is perhaps the only disadvantage.

5. Five-year Fixed Deposits

You can claim tax deductions of up to Rs. 1.5 lakh every year u/s 80C with 5-year FDs. Opening a 5 year-FD is easy as most of the banks offer this product.

What are the risks and returns? 5-year FDs carry very low risk and can fetch 6-7% returns before tax.

What are the key things to keep in mind? This is a safe investment option but may garner lesser returns than other instruments like ELSS. Plus, the lock-in is for 5 years. Most importantly, the returns are also taxable depending on your applicable tax slab.

6. National Pension Scheme (NPS)

NPS is a government-sponsored pension scheme in which all Indian citizens and NRIs between age 18 and 60 years can invest. NPS subscribers can claim tax deductions of up to Rs. 1.5 lakh u/s 80C every year, and an additional Rs. 50,000 u/s 80CCD(1B).

NPS offers two accounts – a mandatory Tier 1 account, and a voluntary Tier 2 account. Subscribers can only withdraw a portion of Tier 1 funds on retirement (the rest must be used to buy annuity plans), while they are free to withdraw funds from Tier 2 account. The invested money can be managed by self (with riders) or by registered fund managers according to your risk appetite.

What are the risks and returns? NPS investments carry moderate risks as they’re exposed to debt and equity products. Five-year returns have varied between 9.3% and 12%.

What are the key things to keep in mind? NPS is a good long-term investment option but is not very tax efficient as only 40% of the invested corpus can be redeemed tax-free.

Hope this guide will help you maximize your tax savings. But keep in mind to choose an option which is best aligned with your long term financial goals.

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The writer is CEO, BankBazaar. The article has been published in collaboration with BankBazaar. Opinions expressed are those of the author.