PPF Vs NPS Vs ELSS Vs Others: Last minute tax saving investment options available under Section 80C

Before you invest your hard-earned money in any of the available investment options, you must take time out to compare and choose the right one based on your risk appetite and return expectations, among others.

FE has estimated net receipts (post-devolution) in FY21 at Rs 14.2 lakh crore, up 5.8% over RE and 4.8% higher than such receipts in FY20.

As the Financial Year 2020-21 is nearing its end, many taxpayers would be in a last-minute rush to make tax-saving investments in order to lower their tax outgo. However, before you invest your hard-earned money in any of the available investment options, you must take time out to compare and choose the right one based on your risk appetite, return expectations, liquidity and taxability of returns.

Let’s closely look at some of the popular tax-saving investment options available under Section 80C of the Income Tax Act:

Public Provident Fund (PPF)

Managed by the Government of India, Public Provident Fund (PPF) is one of the safest investment options eligible for tax deduction under Section 80C. Both its principal and interest components are backed by the sovereign guarantee. The interest rate is reviewed every quarter by the Ministry of Finance based on the government bond yields. As the interest earned and the maturity amount are completely tax-free, PPF offers one of the highest post-tax returns amongst all fixed income investment options.

“While PPF has a long lock-in period of 15 years, it allows partial withdrawals once in a year starting from the 7th year of subscription, whereas premature closure is permitted after 5 years for treating life-threatening diseases of the account holder, spouse, dependent children or parents or for funding higher education of the account holder or his dependent children and in case of change in his residential status,” says Sahil Arora, Director, Paisabazaar.com.

Equity-Linked Savings Scheme (ELSS)

ELSS is primarily diversified equity mutual funds, with a lock-in period of 3 years. It is one of the shortest amongst all investment options available under Section 80C of the Income Tax Act. Being an equity fund, ELSS comes with the similar market risk as other equity funds. However, the returns generated by ELSS funds outperform those of various fixed income investment options under Section 80C by a wide margin over the long-term. ELSS comes under the ambit of LTCG tax on equities, which means that long term capital gains (along with those from other equity products) exceeding Rs 1 lakh in a financial year are taxable @10%.

Tax-Saver Fixed Deposits

Tax-saving fixed deposits (FDs) from the Post Office and banks score high in terms of capital protection and certainty of return. However, the interest income gets taxed as per the applicable tax slab of the depositor. Although tax-saving FDs come with a lock-in period of 5 years, depositors can opt for quarterly or monthly interest pay-out options or can choose the reinvestment option where the interest component is reinvested till the maturity of the FD.

National Pension System (NPS)

NPS is a market-linked investment product aimed at providing post-retirement financial security to its subscribers. While investments in NPS of up to Rs 1.5 lakh per financial year qualify for tax deduction under Section 80C, an additional tax deduction of Rs 50,000 is available for NPS investments under Section 80CCD(1B) over and above the deduction available under Section 80C.

Unit Linked Insurance Plan (ULIP)

ULIPs offer the combined benefits of insurance and investment. While a part of your premium is used for providing your life cover, the remaining part is used for generating returns through investments in equities and/or debt instruments. ULIPs also have a longer lock-in period of 5 years and provide the facility to switch between equity, debt or balanced options depending on your changing risk appetite, financial goals and market outlook.

The Budget 2021 has proposed to allow tax exemption for maturity proceeds of ULIP having annual premium up to Rs 2.5 lakh. However, “the amount received on death shall continue to remain exempt without any limit on the annual premium. The cap of Rs 2.5 lakh on the annual premium of ULIP shall be applicable only for the policies taken on or after 01.02.2021. Further, in order to provide parity, the non-exempt ULIP shall be provided the same concessional capital gains taxation regime as available to the mutual fund,” says Arora.

Sukanya Samridhdhi Yojana (SSY)

Launched in 2015, this government-backed scheme encourages investment for girl’s higher education and marriage. The account can be opened anytime from the birth of a girl child till she reaches 10 years of age, with post office or authorized banks. The principal amount qualifies for tax deduction under Section 80C and the interest earned is tax-free.

National Savings Certificate (NSC)

One of the most popular small investment options is National Savings certificate (NSC), provided by the Postal Department. It’s a fixed investment scheme available with any post office, and is primarily aimed at encouraging small and medium income individuals to invest while saving tax. It involves a lock-in period of five years and the principal and interest both qualify for tax deduction under Section 80C (except interest received in the final year).

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