For both salaried and non-salaried taxpayers, it is the best time for evaluating tax-saving investment opportunities as the tax-saving window has already opened. As a taxpayer, you must seek out investment opportunities that allow you to save tax as well as generating tax-free income for creating wealth. The interest earned on the most popular tax-saving financial products, such as the National Savings Certificate (NSC), Senior Citizens' Savings Scheme (SCSS), and 5-year fixed deposits with banks and 5-year time deposits with post offices, is added to your income and hence subject to taxation. That being said, in order to welcome tax-free income into your personal finance, here are the best tax-saving investments that can be a good bet for you as a taxpayer.
Equity Linked Savings Schemes (ELSS)
Equity-linked savings schemes (ELSS) are a type of mutual funds with two distinct characteristics: first, the amount invested is liable for a tax benefit under Section 80C of the Income Tax Act, 1961, up to a cap of Rs 1.5 lakh per year, and second, it comes with a lock-in period of only 3 years. The asset allocation of ELSS mutual funds is mostly 65 per cent equity and equity-linked instruments. With a lock-in period of just only 3 years, ELSS has the shortest term among the tax-saving investment categories. ELSS funds are now the only tax-saving vehicle that has the ability to outperform inflation. You should be aware that ELSS funds do not provide assured returns and their success is solely contingent on the output of the respective assets. If you don't want to take on more risk, investing through a systematic investment plan (SIP) is a good option. When you invest in a fund with a SIP, you have the option of investing in it throughout market fluctuations. The returns on ELSS are not guaranteed and are based on the success of the equity mutual funds. Furthermore, if the income under this scheme surpasses Rs. 1 lakh at the end of the three-year period, it will be termed Long Term Capital Gain (LTCG) and will be taxed at 10%. Returns of best performing ELSS are as follows for your better clarification.
5 Best ELSS Funds With 1-3 Year Returns
|Top performing ELSS with 1 year returns|
|Funds||1 Year Returns||Rating|
|Quant Tax Plan Fund||123%||5|
|Mirae Asset Tax Saver Fund||78.05%||5|
|Canara Robeco Equity Tax Saver Fund||66.86%||5|
|DSP Tax Saver Fund||64.16||4|
|BOI AXA Tax Advantage Fund||62.67%||4|
|Top performing ELSS with 3 year returns|
|Funds||3 Year Returns||Rating|
|Quant Tax Plan Fund||21.84%||5|
|Canara Robeco Equity Tax Saver Fund||19.14%||5|
|Mirae Asset Tax Saver Fund||18.75%||5|
|Axis Long Term Equity Fund||16.41%||4|
|Kotak Tax Saver Fund||14.81%||4|
|Source: Value Research|
Public Provident Fund (PPF)
The Public Provident Fund (PPF) Scheme has remained a popular investment option for many investors for millennia and is still going strong. Above everything, the principal and tax-free income are assured by the government. PPF currently provides 7.1 per cent interest per annum for the quarter ending March 31, 2021. A minimum annual deposit of Rs 500 is required to keep the account open, whereas a cumulative deposit of Rs 1.5 lakh can be made in a financial year. PPF comes with a long maturity period of 15 years which is the longest among the tax-saving investment categories. After a term of 15 years, the account further can be extended to a block of 3 years as well. A PPF account can be opened by someone of any age and even can be transferred across banks or post offices. An individual cannot claim a tax advantage under section 80C on a deposit to a PPF account under the new tax system. In the current tax system, though, any interest earned or maturity amount gained from a PPF account stays tax-free.
Employees' Provident Fund
Employees' Provident Fund (EPF) is another option that allows a salaried person to make voluntary contributions in order to build up a tax-free emergency fund. Each month, an employee is required to contribute 12% of his basic salary to his or her EPF account. The employee's contributions are tax-deductible up to a cap of Rs 1.5 lakh per year under Section 80C of the Income Tax Act, 1961, apart from the employer's contribution. Both the employee and employer contributions are eligible for tax-free interest each year. A proposal in Budget 2021 was announced to restrict the deduction on EPF return earned. According to the provision, if the total investment in VPF and EPF in a financial year exceeds Rs 2.5 lakh, the returns received on the contribution over Rs 2.5 lakh will not be tax-free. This will take effect on April 1, 2021, and will apply to the fiscal year 2021-2022. The VPF is just only an extension of the EPF where the interest earned on the EPF/VPF plan is tax-free if the employee works for five years or longer. On Thursday, March 4, the Employees' Provident Fund Organization (EPFO) maintained the interest rate at 8.5 percent for fiscal 2020-21, steady from the previous year.
Unit Linked Insurance Plan
A Unit Linked Insurance Plan (ULIP) bundles insurance and investment into one product. Here the insurance provider places a portion of your deposit in life insurance and the remainder across equity, debt. In 2010, the Insurance Regulatory and Development Authority of India (IRDAI) increased the lock-in duration for ULIPs from three to five years. That being said, because insurance is a long-term asset, you may not enjoy the full advantage of the scheme until you keep it for the entire duration which can vary 15 to 20 years. That being said, the tax reform in Budget 2021 has ULIP investors concerned about this widely used tax-free investment tool. The return on your current ULIP investment will no longer be tax-free if the annual premium is higher than Rs 2.5 lakh in the potential. Only the maturity proceeds of ULIPs with an annual premium up to Rs. 2.5 lakh will be eligible for tax exemption under Section 10(10D). The income/return on the maturity of ULIPs with an annual premium above Rs 2.5 lakh will be considered as capital gain and taxed accordingly under section 112A. Though, the limit of Rs. 2.5 lakh on the annual premium of ULIPs will apply only to policies adopted on or after Feb-1, 2021.
Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana (SSY) is a small saving scheme of the post office for a girl child, that was introduced as a major aspect of the 'Beti Bachao Beti Padhao' initiative. With an option of tax-deductions, this scheme currently provides a higher interest rate of 7.6%. With a minimum deposit of Rs 250 up to a limit of Rs 1.5 lakh a Sukanya Samriddhi Account can be opened at any time after a girl's birth before she turns ten years of age. The account will be active for 21 years from the date of opening or before the girl marries after she turns 18 years old. SSY is backed by the government and has the exempt-exempt-exempt (EEE) classification. The contribution is tax-deductible under Section 80C, and the maturity benefits are not. Individuals who invest in the Sukanya Samriddhi Yojana for their girl child will continue to earn tax-free interest in the account even though the tax regime changes. In addition, the payment proceeds earned from the scheme's account will be tax-free. That being said, under the current tax regime, contributions made under this scheme will not be liable for a tax exemption under section 80C.
5-Year National Savings Certificate
An Indian resident can purchase a National Savings Certificate (NSC) from any post office in order to get a guaranteed return and tax benefit. Since it is a fixed-income scheme, investors with a low-risk appetite those looking to diversify their investments through a fixed-return vehicle can consider NSC as a part of their personal finance space. The interest rate on the National Savings Certificate is subject to change every quarter based on announcements made by the Finance Ministry of India. For Q1 FY 2020-21 (April to June), the applicable NSC interest rate is 6.8%. NSC with a lock-in period of 5 years can easily be purchased at any post office by depositing a minimum amount of Rs. 1000 and in multiples of Rs. 100 with no upper limit. Up to Rs. 1.5 lakhs of annual tax savings are eligible under Section 80C of the Income Tax Act, 1961. The interest received annually from an NSC (for the first four years) is considered to be reinvested, making it tax-free and qualifying for a Section 80C deduction. The interest gained in the fifth year, on the other hand, is not re-invested and is not taxed at the investor's relevant slab limit.