On 24th March 2020, FM Nirmala Sitharaman extended few tax deadlines to 30th june 2020. One of the deadlines which was extended was to do tax saving investments for FY 2019-20 which now can be done by 30th june 2020 instead of 31st March 2020. This announcement will prove beneficial for those taxpayers who were unable to invest till date specifically because of coronavirus. The extension is given keeping in view senior citizens or people who are not very comfortable doing online transactions and prefer doing it physically. But because of the lockdown owing to COVID-19 pandemic, they could not do it.
As the country is now lockdown for 21 days, let’s see what are the options we have to invest. Choosing the right tax-saving investments may not come easy for everyone. While some options are market-linked and others are those that come with assured returns. One may decide this on the basis of his/ her risk appetite.
All the investment shared here are eligible for deduction under 80 C where the maximum limit is 1.5 lacs. Now let us explore the different avenues : –
Public Provident Fund – So if you are someone who does not want to take much risk with their investment and wants assured returns, you can opt for PPF. The tenure is 15 years and partial withdrawal is allowed after 5 years subject to certain conditions. Interest received is tax free. However, for long-term goals, it is better to take equity exposure as inflation eats most of the assured returns from PPF. It is recommended for high amount goals invest in equity mutual funds, including tax-saving equity-linked savings schemes (ELSS) and not solely depend on PPF.
Equity Linked Saving Scheme – As said above, for long term wealth creation purposes, one should opt for ELSS. An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961. These schemes have a lock-in period of three years from date of units allotment. After the lock-in period is over, the units are free to be redeemed or switched. ELSS is the only tax saving instrument with the lock in period of only 3 years. This is the least lock in period among all the tax saving investments. As it is linked with market, in the longer period of time, it can give you far better returns easily beating inflation.
Voluntary Provident Fund – For an employee it is compulsory to contribute 12 percent of one’s basic pay (employer contributes equal amount) into one’s Employee’s Provident Fund (EPF). However, one may voluntarily increase one’s own contribution up to 100 percent of basic into Voluntary Provident Fund (VPF). Please note the employer will not match the increased voluntary contribution to PF. The provident fund statement will show the breakup of contribution towards EPF as well as VPF. Here, keep in mind that this investment is particularly for retirement and so gets locked in for a very long tenure upto retirement.
Senior Citizens’ Savings Scheme – It is the favourite choice of most of the senior citizens about to retire because of the fixed interest rate. As the name says, it is available only for investors who are 60 years old or above or early retirees with certain conditions. Please note here that interest is payable quarterly and is fully taxable. Maximum amount that is invested here is 15 lakhs.
Tax Saving Fixed Deposit – Tax saving FD is a FD which is for a term of 5 years. When you make an investment into a bank, you need to tell them that you want a tax saving FD because any 5 year FD will not be eligible for saving tax. Looking at the current situation of bank crisis, one must avoid doing huge investments in bank FD.
Unit Linked Insurance Plans – ULIPs are a mix of insurance and investment. A part of the invested premium amount in ULIPs is used to provide insurance and the rest of the amount is invested in the markets. There are different fund options available based on risk appetite of the customer like aggressive, conservative or balanced. Here, the lock in period is of 5 years.
Some of the other options are Sukanya Samriddhi yojna which is specifically for a girl child, NPS which is specifically for retirement, Life insurance traditional policies which meets your insurance needs but are very low in returns.
Which one is the best option?
Investment in ELSS Fund or Tax Saving Mutual Fund is considered as the best tax saving option. These funds are specially designed to give you dual benefit of saving taxes and getting higher returns on investment. The reason it is considered best among all the options is it has least lock in period giving you better liquidity. Also, historically, it has delivered higher returns compared to PPF, NPS, Tax FD, Insurance policies etc.
You may now take an informed decision as where to invest for tax saving.