Jul 10

Investment ideas for availing tax benefits

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As per the investment experts of the world, we should diversify our investment and should not invest in one investment instrument only. The investment portfolio of a person should have a good mix of balanced, conservative, and aggressive investment instruments, along with government-backed options. In addition to this investment should be in a way that it should save the tax as well.

So, to keep the confusion of an investor at the side, we are here providing some of the best short term investments for availing tax benefits:

  1. Equity-linked Saving Schemes: The Equity-linked Saving Schemes or more commonly known as ELSS. Apart from a wide range of funds, flexibility, and good returns, ELSS has the shortest lock-in period of approximately three years among other short term investments provided under Section 80C. The ELSS generate good returns as compared to various other tax saving schemes but it comes with greater risk. There is no limit on the investment amount under this scheme, but the tax benefit that is available here is Rs.1.5 Lakh only.
  2. Public Provident Fund: This is one of the most favorite types of investment scheme because of its good interest rate. The investments made under PPF are eligible for income tax deductions as per Section 80C of the Income Tax Act. The minimum investment that one can make against PPF is as low as Rs.500 and maximum is Rs.1.5 Lakh per year or in a financial year. The interest rate that in the year 2019 is 8% and is tax-free. The maturity period of PPF is 15 years.
  3. National Pension System: Any contribution that one makes against National Pension System is eligible for deductions in Section 80CCD (1). However, it is to be noted that the total deduction under Section 80CCD (1) and Section 80C cannot be more than Rs.1.5Lakh.
  4. National Savings Certificate: Another good tax-saving instrument is the National Savings Certificate or NSC. The maturity period of this scheme is five years and one can purchase NSC in Rs.100 minimum, however, there is no limit on the amount of investment. Any investments that one makes towards NSC are eligible for tax deductions under Section 80C. The interest on NSC is annually compounded and is taxable. However, one thing that an NSC investor should keep in his/her mind is, even the earned interest (of every year), except the interest of the last year, can easily be claimed as a deduction from the interest that is taxable under Section 80C of the Income Tax Act, which is subject to the allowed limit of this section. This is possible only when the deduction limit, which is Rs.1.5Lakh, is not completely used.
  5. Senior Citizen’s Saving Scheme: The retirees can easily save tax by investing in this scheme. A person who is more than 55 years but less than 60 years and has opted for Special Voluntary Retirement Scheme or Voluntary Retirement Scheme can easily opt for this scheme, however, such account should be opened at least within three months of the date of retirement. If one is retired from the defense, then he/she can open an account under Senior Citizen’s Saving Scheme only when he is 50 years old. Earlier, there was no age limit for retired defense personals under this scheme.
  6. Unit Linked Insurance Plans: Even though ULIPs were not considered as the best short term investments, but new age ULIPs are a good method for investing in debt and equity markets to get tax-free returns. To make ULIP more approachable and user-friendly, its guidelines have been reformed in the year 2010. After which, ULIP has become one of the options to invest-in for tax saving. In addition to other benefits of ULIP, it as well offers life cover, but its major role is investment, instead of protection.
  7. Bank Fixed Deposits for Five Years: Any term deposit that one does with some scheduled bank for five years is termed as Bank’s Fixed Deposit. This investment also qualifies for a tax deduction as per Section 80C of the Income Tax Act. Moreover, the interest earned on FDs is taxable.
  8. Health Insurance: Even though health insurance plans are not typical investments, they are safety instruments that protect the policyholder and his/her family members against medical expenses. The premiums that one pays towards the health insurance plans of self, spouse, children, and parents attract tax benefits, which are subject to some conditions and terms. A health insurance policyholder can claim a deduction of Rs.30, 000 as a senior citizen and up to Rs.25, 000 for the rest of the people. The tax exemptions under this scheme can be claimed under Section 80D of the Income Tax Act.
  9. Debt-Based Mutual Funds: These kinds of schemes basically invest the money of the investor in the instruments of the money market like treasury bills, corporate bonds, government securities, etc. and give a fixed return. These schemes are tax-efficient alternatives of short-term investments like fixed-deposits of the bank. Debt-funds that perform well may offer up to 7 to 8% post-tax returns, which make them one of the best short term investments. Unlike bank fixed-deposits, debt mutual-funds do not levy any penalty on premature withdrawals. The debt mutual funds offer indexation benefits, and the dividends that are earned are tax-free.
  10. Rajiv Gandhi Equity Savings Scheme (RGESS): This scheme has a lock-in period of three years, wherein the fixed lock-in period of one year is there and it is flexible for the next 2 years. 50% of the invested amount, which is equal to the investment that is a maximum of Rs.50, 000, is qualified for a tax deduction as per Section 80CCG of the Income Tax Act. However, if one is a first-time equity investor, then he/she should try to avoid this option.

The Bottom Line: Before making any choice for short term plans, go through the above list of investments and make your investment portfolio diverse as per the risk appetite. The 10 best short term investment plans that are explained above are according to five basic parameters – flexibility, returns, liquidity, safety, and taxability.


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