These 5 tax saving investment options serve dual purposes for you. Along with tax savings, they help in wealth creation in the long run.
As the financial year nears its end every year, taxpayers start looking for tax saving instruments available.
There are lots of conventional tax saving options available for the individual taxpayers. They are quite popular among the conservative tax payers being government saving schemes.
Most common of them being Public Provident Funds(PPFs), Life Insurance Schemes and National Savings Certificates or NSCs. We are not going to discuss them here (assuming everybody knows about them).
No doubt, all these are good options as tax savers but these are not considered good for savings nowadays.
The disadvantage with them is that they provide lower rate of returns as compared to other options available.
They fail to beat the Inflation in the long run. Hence effective rate of return becomes much lower. Rate of return on these options is around 7% and inflation hovers around 4%. The effective returns we get would come out to be only 7 – 4 = 3%.
It would be a really great strategy if we go for tax saving investment options. These options add another goal of wealth creation along with primary purpose of Tax Saving. So, they act like saving and investment options.
Another very important point is to invest in your and your dear one’s health and also get the benefit of tax saving.How can we do all that, lets find out.
Table of Contents
Top 5 Tax Saving Investment Options
Below are the best 5 tax saving investment options. You can take invest in combination of schemes to make a good portfolio of yours. They make good
savings and investment options in India.
1. Equity Linked Savings Scheme or ELSS
It is a type of mutual fund investment where you have the luxury of making investment in small regular installments in tax saving funds. Minimum lock in period is only 3 years as compared to 6-8 years in other tax saving schemes.
To get the best results of ELSS, you should start investing from day one of the financial year in monthly intervals. Don’t wait for the end of the year to invest. Also give longer than 3 years of investment period for the ELSS to show you the wonders.
However, it is worth remembering , ELSS is market related and has market risks associated with it. But if you keep it for minimum five years, it has the potential to give you returns above 12-14% when calculated annually. You can read more about ELSS here. It is tax exempted under section 80c of Indian Income Tax Act.
2. Unit Linked Insurance plans or ULIP’s
ULIP plan provide dual benefits of tax saving and investment in market in addition to insurance.
The drawback with ULIP plan is its high cost in the initial years and long term holding period which can be 15-20 years. If you can afford to keep investing year by year and hold it for 20 years, you can earn handsome returns.
The cost of investing in ULIPs goes on decreasing every year. The initial costs get recovered as longer term investment in equity has the potential to beat all other assets return wise. Tax saving in this tool falls in ₹ 1 lac exemption limit under Indian Income tax Act.
3. Long Term Infrastructure bonds
Investments in long term infrastructure bonds tax are exempted up to ₹ 20000.
They have fix rate of return which is little more than routine tax savers and the holding period is around 10 years and lock in period is 5 years.
The savings in these bonds is above the limit of ₹ 100000. You should invest in these bonds only after you have exhausted your ₹ 1 lac limit.
4. Health Insurance
If you have not bought health insurance or medical insurance yet, you should seriously consider it. It should be in your priority list to buy one for yourself and your loved ones.
You might know how costly the health care is getting now and nobody knows when he or she has to seek it.
The premium you pay is exempted from taxable income up to ₹ 15000-20000 and it is above that ₹ 100000 limit.
Moreover, you can buy health insurance for your parents and get additional benefit up to ₹ 20000.
5. New Pension Scheme (NPS)
Latest to the list is the New Pension Scheme or NPS. This scheme is a retirement solution to the employees of central and state governments.
NPS is based on investment in pension funds by contribution from the employee and the concerned government.
Employee’s pension contribution stands at 10% of his basic salary and dearness allowance. Government contribution is also 10% in case of state governments. New pension contributions have been revised to 14% from previous 10% for central government in recent recommendations.
The contribution is tax exempt under section 80C of the Indian Income Tax Act. Tax benefits upto ₹ 1,50,000 can be availed by investing in Tier-II account of the NPS.
Pension funds in the NPS scheme has the potential to yield returns around 8-14%. Keeping in view the long term investment horizon (till 60 years of age of the employee), it can be one of the best tax saving investment options to create wealth.