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Best ways to save income tax: 10 tax-saving investment options for you
ET Wealth Annual Ranking of Tax-Saving Instruments: Making the Right Choices
ET Wealth Annual Ranking of Tax-Saving Instruments: Making the Right Choices
The ET Wealth annual ranking of tax-saving instruments provides a comprehensive assessment of 10 tax-saving options based on eight key parameters—returns, safety, flexibility, liquidity, costs, transparency, ease of investment, and taxability of income. The ranking aims to assist individuals in making informed decisions about their tax-saving investments. The assessment considers the equal weightage of each parameter, and the composite scores determine the place in the ranking.
Key Takeaways:
1. NPS (National Pension System)
Returns: 8.16% in the past five years
Lock-in: Till retirement
The NPS continues to be the top tax-saver for the second year running, offering additional deductions under various sections.
The NPS has become more flexible and investor-friendly, with increased equity allocation and the introduction of the systematic withdrawal option.
Equity funds of the NPS have performed well, and even gilt and corporate bond funds have delivered decent returns.
2. ELSS (Equity Linked Savings Scheme) Funds
Returns: 18.24% in the past five years
Lock-in: 3 years
ELSS funds have moved up to the second place in the ranking, especially large-cap oriented schemes, expected to perform well in the near term.
They score high due to transparency, low costs, and the shortest lock-in period among tax-saving options.
3. ULIPs (Unit Linked Insurance Plans)
Returns: 8.15% in the past five years
Lock-in: 5 years
Ulips continue to be a tax-efficient option, offering tax-free maturity proceeds and flexibility in switching between funds.
However, they have longer lock-in periods compared to ELSS funds.
4. Senior Citizens’ Savings Scheme
Returns: 8.2% in Jan-Mar 2024
Lock-in: 5 years
SCSS is the best investment option for those above 60, offering a higher interest rate and unlimited extensions.
5. Retirement Mutual Funds
Returns: 7-9% in the past five years
Lock-in: 5 years
These hybrid funds invest in a mix of equity and debt, providing stability and good returns.
6. Pension Plans
Returns: 7-14% in the past five years
Lock-in: Till retirement
Pension plans from insurance companies can’t match the NPS on costs, flexibility, and tax benefits.
7. PPF (Public Provident Fund)
Returns: 7.1% in Jan-Mar 2024
Lock-in: 15 years from inception
PPF offers tax-free interest and is a safe and assured option for building a tax-free corpus.
8. NSCs (National Savings Certificates) and Tax-Saving FDs (Fixed Deposits)
Returns: 7-8%
Lock-in: 5 years
These options are suitable for late risers and senior citizens who may have exhausted the investment limit in SCSS.
9. Life Insurance Policies
Returns: 5-6%
Lock-in: Minimum 5 years
Life insurance policies are the worst way to save tax, offering low returns and inflexibility.
The article provides a comprehensive overview of 10 tax-saving investment options, including National Pension System (NPS), Equity-Linked Savings Schemes (ELSS), Unit Linked Insurance Plans (ULIPs), Senior Citizens’ Savings Scheme (SCSS), Sukanya Samriddhi Yojana, Retirement Mutual Funds, Pension Plans, Public Provident Fund (PPF), National Savings Certificates (NSCs) and Tax-Saving Fixed Deposits, and Life Insurance Policies. Each investment option is evaluated based on eight key parameters: returns, safety, flexibility, liquidity, costs, transparency, ease of investment, and taxability of income.
Here’s a detailed breakdown of the tax-saving investment options and their key features:
1. National Pension System (NPS)
Returns: 8.16% in the past five years
Lock-in: Till retirement
Tax Benefits: Offers deductions under Section 80C and additional deduction under Section 80CCD(1b)
Flexibility: Allows for equity allocation up to 75%, change in asset mix, and investment in funds of multiple pension fund managers
Performance: Equity funds have performed well, and the NPS has become more flexible and investor-friendly
Recommendation: NPS continues to be the top tax-saver for the second year running
2. Equity-Linked Savings Schemes (ELSS)
Returns: 18.24% in the past five years
Lock-in: 3 years
Tax Benefits: Offers deductions under Section 80C
Flexibility: Transparent, low costs, and a short lock-in period
Performance: Expected to do well in the near term, especially large-cap oriented schemes
Recommendation: ELSS funds have moved up to the second place in the ranking this year
3. Unit Linked Insurance Plans (ULIPs)
Returns: 8.15% in the past five years
Lock-in: 5 years
Tax Benefits: Maturity proceeds are tax-free under Section 10(10d) if the life cover is at least 10 times the annual premium
Flexibility: Allows for periodic withdrawals and switching between debt and equity funds
Recommendation: ULIPs continue to be a tax-efficient option, but have longer lock-in periods compared to ELSS
4. Senior Citizens’ Savings Scheme (SCSS)
Returns: 8.2% in Jan-Mar 2024
Lock-in: 5 years
Tax Benefits: Offers deductions under Section 80C, but interest earned is fully taxable as income
Flexibility: Allows for unlimited extensions in blocks of three years each
Recommendation: Best investment option for those above 60, with an interest rate better than that offered by most banks
5. Sukanya Samriddhi Yojana
Returns: 8.2%
Lock-in: Till maturity
Tax Benefits: Tax-free interest
Flexibility: Restricted entry, open only to taxpayers with daughters below 10 years
Recommendation: Most lucrative scheme in the small savings basket, but has restrictive entry conditions
6. Retirement Mutual Funds
Returns: 7-9% in the past five years
Lock-in: 5 years
Tax Benefits: Eligible for deduction under Section 80C
Flexibility: Invest in a mix of equity and debt instruments
Recommendation: Offers stability and good returns, suitable for investors with a low risk appetite
7. Pension Plans
Returns: 7-14% in the past five years
Lock-in: Till retirement
Tax Benefits: Limited tax advantages compared to NPS and ULIPs
Flexibility: Tied to the same insurance company till the plan matures
Recommendation: Can’t match the numerous tax advantages that the NPS and ULIPs enjoy
8. Public Provident Fund (PPF)
Returns: 7.1% in Jan-Mar 2024
Lock-in: 15 years from inception
Tax Benefits: Tax-free interest, eligible for deduction under Section 80C
Flexibility: Progressive reduction in lock-in period
Recommendation: Offers a safe and assured option, helping build a tax-free corpus
9. National Savings Certificates (NSCs) and Tax-Saving Fixed Deposits
Returns: 7-8%
Lock-in: 5 years
Tax Benefits: Interest earned on NSCs is eligible for deduction in the following years
Flexibility: Quick investment process with minimum effort
Recommendation: Good option for late risers and senior citizens who may have exhausted the investment limit in SCSS
10. Life Insurance Policies
Returns: 5-6%
Lock-in: Minimum 5 years
Tax Benefits: Corpus is tax-free, but flexibility and returns are very low
Recommendation: Considered the worst way to save tax due to low returns and inflexibility
In conclusion, the article provides a detailed analysis of various tax-saving investment options, their key features, and recommendations based on their performance and tax benefits.
