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Investments Options That Offer Tax Benefits

When the time comes to file income tax returns, many people find themselves scrambling to make investments offering tax benefits. Today, there are many options for tax-saving investments. To choose the best among them, consider their risk factors, returns, and liquidity.

So, with these factors in mind, here are some of the best investments offering tax benefits.

Best Investments Options That Offer Tax Benefits

Equity-linked Savings Scheme (ELSS):

ELSS mutual funds top the ranks of tax-saving investments with consistently high returns, especially in the long term. Today, the best SIP plans offer returns of 19–24%. They also have the shortest lock-in period among all the tax-saving options. ELSS funds are subject to volatility due to their exposure to equities, so, it is advisable to invest in them via a systematic investment plan (SIP).
So, choose the best SIP for investment, rather than making a lump sum investment. ELSS funds are affordable, and even the best SIP plans can have a minimum entry point of Rs 500 to Rs 1000. When looking for the best SIP for investment, consider the segment the fund invests in and its risk factor. Every mutual fund has a mandatory riskometer rating, making it easy to check the risk involved.

National Pension Scheme (NPS):

The NPS has a long lock-in period as your investment is locked until you reach the age of 60. Despite the extensive lock-in, NPS is a good choice for investment as 60% of the accumulated corpus withdrawn at the time of retirement is tax-free. Plus, you can remain invested in the NPS until you reach the age of 70. It allows staggered withdrawals. Younger investors can opt to invest up to 75% in the equity market.
NPS is suitable for long-term investment and particularly for high-income earners. However, other than deductions under Section 80C, investors get an additional deduction of Rs 50,000 under Section 80 CCD. If employers put 10% of the employee’s basic income in the NPS, that amount remains tax-free. The returns offered by the NPS range from 8–11%, which is good but not as attractive as what the best SIP plans can offer.

Unit-linked Investment Plans (ULIPs):

With these investments, a part of the corpus goes toward mutual fund investment and the rest to insurance cover. ULIPs have a slight advantage over ELSS funds as investors can switch from equity to debt funds and vice versa, depending on market performance and that too completely tax-free. In ULIPs, investors may also opt to invest in both equity and debt within the same product.
The income from ULIPs is tax-free provided the annualized premium is less than 10% of the sum assured. ULIPs have a lock-in of 5 years. ULIPs have average returns of 9–15%. If you are trying to choose between the best SIP for investment and ULIP investment, keep all the above factors in mind.

Public Provident Fund (PPF):

PPF offers tax-free returns at a rate of 7.1% but has a lengthy investment tenure of 15 years.  It has a lower return rate compared to the best SIP plans, but it is an investment where you can’t go wrong. It scores high for its assured returns, high safety profile, and tax-saving benefits.
You can even extend your investment after 15 years in blocks of 5 years. PPF investment offers better returns compared to other traditional instruments like bank fixed deposits.

The takeaway

The best time to invest in tax-saving is at the beginning of the financial year. Don’t wait until the last minute to make financial decisions. Take your time, do your research and make a wise decision that will maximize your returns while offering tax-saving benefits.

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