It is the time of the year when investors would be busy planning for the tax saving season. There are several instruments, where you can save tax. However, the question often arises as to which is the best tax saving instrument, where investors could park their money. The answer lies in your ability to take risk. Each of the instruments mentioned below analyzes the risk, to the instruments, before you can take a decision.
Equity Linked Saving Schemes (ELSS) is the most risky tax saving instrument. This is because the instrument invests its corpus in equities. So, if you are betting on equities rising in the next three years and being substantially higher from the current levels, we suggest that you go for this instrument.
Otherwise, you might not be able to protect your capital. With the Sensex at 36,000 points, we believe that ELSS could be a risky instrument, if you are going to encash the ELSS after three years.
Remember, that all ELSS instruments come with a lock-in period of three years, to benefit from SEC80C tax benefits.
If you are a risk averse investor, we suggest that you deploy money in the Public Provident Fund or PPF. This is a scheme operated by the government. Tax benefits under SEC 80C accrue to the investor to the tune of Rs 1.5 lakhs per annum.
The current interest rate on the PPF is around 8 per cent. Interestingly, along with 80C benefits, the amount earned by way of interest is also tax free in the hands of the investor. The only problem is that you can withdraw money partially only after 7 years.
The National Saving Certificates are also run by the government of India and are relatively safe. Currently, the interest rate on the NSC is placed at 7.6 per cent per annum.
Again, this is a very safe investment and has a lock-in period of 5 years. It can also be pledged in case of need. The only problem is that should interest rates in the economy gain, you would kind of lose, given that you have locked money at 5-years at a fixed interest rate.
Like other tax saving instruments you get SEC80C benefits to the tune of Rs 1.5 lakhs per annum.
The Unit Linked Insurance Plan is really a mix of insurance and returns. You get 10 times the sum assured, based on your premium. So, if you pay a premium of Rs 1 lakh, the insured amount if Rs 10 lakhs.
One has the choice to invest the money either in equity or debt. The returns are very low, given the fact that 4-5 per cent, may go in administration and other charges. It is a good idea to take a term plan and this is not the best instrument for insurance purposes.
You can save tax through various other instruments like the Sukanya Samrudhi and the KVP. Again, both these are issued by the Government and are hence very safe.
Investors should decide on the type of instrument based on their own preferences and ability to take risk.
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