As the cost of living is increasing day by day, individuals and families need to ensure saving money for the future. When you wish for a financially safe future, then you want to put significant effort towards investment and insurance. With proper financial planning, your investments can become meaningful. This can provide you with a lump sum in the future.
Saving alone is not enough; investing in the right places and in the right way is essential for good returns. Taxes can take a large portion of your income. To reduce this impact, consider tax-efficient investment plans. Under Section 80C of the Indian Income Tax Act, the government allows an exemption on investments up to Rs. 1.5 lakhs.
There are many schemes and investment options to consider. Among them, ELSS, FD, and PPF are the three most popular choices. Take time to understand each option and determine which best suits your needs and plans.
Tax Saving Fixed Deposit:
If you don’t want to take risks with your investments, a fixed deposit is the best option for you. Compared to other long-term investments, a fixed deposit ensures your money is safe and provides guaranteed returns.
The returns from a fixed deposit do not depend on the market, so you receive guaranteed profits. If you choose a tax-saving fixed deposit, you can also claim a tax exemption based on your income slab. While filing your income tax, you should make sure to mention your fixed deposit under section 80 C.
Features:
- A tax-saving fixed deposit has a lock-in period of five years. You cannot cancel or withdraw it before this period ends.
- You are privileged to claim up to Rs.1.5 lakhs each year when you submit your claim under section 80 c.
- When you are an individual or Hindu Undivided Families (HUF), you are eligible for opening the fixed deposit account.
- When you open a joint account, only the first holder can claim tax deduction benefits.
- The minimum and maximum investment amounts for a fixed deposit depend on the financial provider.
- The interest rate also depends on the provider and the tenure you choose for your fixed deposit.
- Many financial providers are giving an additional increase in the interest rate for senior citizen deposits.
- Premature withdrawals are not allowed with a tax-saving fixed deposit. In regular fixed deposits it will come along with a fine.
- TDS deduction will depend upon the income slab which you come under.
Equity Linked Savings Scheme (ELSS):
ELSS is a mutual fund type which offers tax exemptions under the Indian Income Tax Act. In this scheme, the majority of the corpus which you invest goes to be invested towards equities. This scheme depends on the market for its returns, so it’s a bit risky. The performance of the plan will also depend on your equities stock in the market.
Features:
- There is a mandatory three year lock-in period in this investment type before which you cannot cancel or withdraw it.
- ELSS investment comprises two options – growth and dividend.
- With growth, the entire corpus amount will be provided at the end of the maturity.
- With the dividend option, you can get tax-free dividends even under the lock-in period.
- There is no maximum investment limit for ELSS. However, you can claim a tax exemption of up to Rs. 1.5 lakh.
- Even later to the lock-in period of three years, you can continue with the same investment if you want.
- Since these depend on the market for returns, they carry higher risk compared to other investment options.
Public Provident Fund (PPF):
PPF, or Public Provident Fund, is a long-term investment option that helps individuals save for a secure future. PPF is a government based scheme which specialises on making a smoother and secured investment for individuals for their future. Any Indian resident can apply for this investment scheme. Even a PPF account can be opened for minors with either their parents or guardians as joint account holders.
Features:
- PPF is a risk-free long term investment plan which is backed up with the support of the government.
- The compulsory lock-in period for this investment is 15 years. It can be extended indefinitely in blocks of five years.
- The minimum investment for a PPF account is Rs. 500 per year. The maximum investment allowed is Rs. 1.5 lakh.
- Under Section 80C of the Indian Income Tax Act, you can claim a tax deduction of up to Rs. 1.5 lakh for contributions to your PPF account.
- It also offers a unique EEE tax benefit, meaning both the interest earned and the maturity amount are exempt from tax.
- The interest rate for a PPF account currently is 8% for which the interest will be compounded yearly.
- You can contribute to your PPF account as a lump sum or in instalments. If using instalments, you can make up to twelve contributions per year.
- If you want to withdraw money before the full tenure, you can do so starting from the 6th year of your account.
- A PPF account can be opened in only one person’s name. Joint accounts are not allowed.
- You can avail for a loan against your PPF amount when you require emergency funds.
Tax Saver FD vs PPF vs ELSS:
Tax saver FD:
A tax-saving FD is a safe, risk-free investment. It is ideal for conservative investors who want to avoid risk. There are many other investment options which are risk-free, but the tenure will be longer than this. Depending upon your financial provider, the interest rates on your fixed deposits vary. The interest earned from a fixed deposit is subject to TDS, which lowers your effective rate of return.
ELSS:
When you are an individual who is ready to take higher risk and gain more from your long term returns, then the ELSS is a perfect solution for you. When you don’t want to put your investment directly in the equity market but want to invest, then it best suits you. ELSS also comes with a tax advantage. The average return which you can get on this scheme will be around 15 to 20%, depending upon the tenure you choose and the market instability.
PPF:
When you need fulfilling a long term financial goal, then a PPF is the best option for you. This option is suitable for everyone who is thinking about investing for their retirement. When you start a PPF account, you should invest in it continuously for 15 years at any number of times per year. The current interest rate on a PPF account is 8% which is one of the highest which you can get in the current market.