There are multiple investment options available in the market to save tax such as Mutual Funds (ELSS), 5-year Bank FDs, PPF, ULIPs, NSCs, and NPS. Investors may get confused while picking the right fit of tax saving investment for them. The article aims to present a comparative analysis of popular tax saving options available in India.
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Secondly, under Section 80 CCD(1B) you get an additional deduction for contributions up to Rs. 50,000 exclusively for NPS. If you use both of these deductions, you can claim tax deduction benefits up to Rs. 2 lakh in total. If you are in the 30% tax bracket, you can save as much as Rs. 62,400 in tax.
|ELSS Funds||12-14%||3 years|
|5 year FD||6-8%||5 years|
|NPS||8-10%||Till age of 60|
*Returns provided are estimates based on historical returns. Actual market returns may vary.
1. ELSS (Tax Saver Mutual Funds)
ELSS or tax-saving funds are a type of mutual fund which primarily invests in equity and comes with a lock-in period of 3 years. ELSS has become a highly popular mode of investment because of returns to the likes of 12-15% along with added tax benefits.
You can invest in an ELSS fund directly from the website of the fund house (Asset Management Company) or through online aggregators such as Paisabazaar. The minimum amount for investing in these funds changes from one fund to another but can start as low as Rs. 500.
The returns on ELSS funds are taxable under Long Term Capital Gains Tax at 10% for gains above Rs. 1 lakh in a financial year. If these funds pay dividends, they are subject to Dividend Distribution Tax (DDT) also, at 10%.
Also Read: Best ELSS Funds to Invest in 2019
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2. 5-Year Tax Saver FDs
These fixed deposits are available with most major banks in India and post offices. The rates on bank FDs currently range from 6% to 7.25%. Tax Saver Fixed Deposits come with a lock-in of 5 years and no loans can be taken against them. The interest on these FDs is fully taxable and subject to TDS.
3. Public Provident Fund (PPF)
PPF or Public Provident Fund is a government guaranteed investment option that provides fixed returns along with tax benefits under section 80C. A PPF account can be opened through post offices and most of the major banks. PPF deposits have a lockin period of 15 years.
Its interest rate is fixed but reviewed by the government every quarter. The current interest rate on PPF has been fixed at 7.9% for Q1 FY 2019-20. PPF investments come under Exempt-Exempt-Exempt (EEE) category which means that apart from the principal investment (up to Rs. 1.5 lakh a year), interest and maturity value is also tax-free.
You can start your PPF account with a minimum contribution of Rs. 500 per year and a maximum of Rs. 1.5 lakh in a financial year.
4. Unit Linked Insurance Plans (ULIPs)
ULIPs or Unit Linked Insurance Plans are popular because they offer dual benefits of life insurance and investment. These insurance policies have a lock-in of 5 years. The minimum premium amount varies from one ULIP to another but can start as low as Rs. 5,000. The typical ULIP will require you to pay premiums for at least 5 years. There are single premium ULIPs as well, but these are not usually eligible for tax benefits.
While dual benefits may look good at its face value, ULIPs come with a host of charges such as premium allocation charge, fund management charge, policy administration charge, mortality charge, etc. which may effectively reduce your net returns by a significant margin. It is advised to look around for ULIPs with relatively low charges.
The returns on ULIPs where the insurance cover is more than 10 times the annual premium are tax-free under Section 10(10)(D) of the Income Tax Act, 1961. You can buy a ULIP from an insurance company’s office or website.
5. National Savings Certificate (NSC)
NSC or National Savings Certificate is a savings instrument created by the Government of India. It has a 5-year tenure. Its interest rate is reviewed every quarter but is currently 8%. The interest on NSC is also eligible for deduction under Section 80C.
For example, if you have invested Rs. 1 lakh in NSC and it pays interest of Rs. 8,000, the interest amount will also be tax-deductible. Hence your total tax deduction will go up to Rs. 108,000.
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However, note that both, unlike tax saver FDs where interest is taxable, an NSC investor can claim tax benefits on both the principal and the interest subject to the Rs. 1.5 lakh tax deduction limit. The minimum investment for NSC is as low as Rs. 100. You can buy NSCs from post office branches. Further, you can also pledge your NSC certificate to take a loan against it.
6. National Pension System (NPS)
NPS or National Pension System is uniquely positioned among the tax-saving instruments. This is because NPS contributions are entitled to tax deduction up to Rs. 1.5 lakh under Section 80CCD and an additional deduction up to Rs. 50,000 under Section 80 CCD(1B). This additional deduction is given to no other tax saving instrument apart from Atal Pension Yojana – it is exclusively for NPS.
NPS contributions can be invested in equities (stocks), corporate bonds and government bonds through an NPS pension fund. The NPS account matures at the age of 60 and you can withdraw 60% of the accumulated corpus tax-free.
You must use the balance of 40% of the corpus to buy an annuity (monthly pension). This purchase is tax-free but the annuity itself is taxable every year. The minimum NPS annual contribution is Rs. 1,000. You can read more about the NPS here.
All of the above provisions apply to NPS Tier 1. The Government has announced plans to extend the 80C tax deductions to NPS Tier 2 as well with just a 3-year lock-in. So far this new announcement only pertains to government employees but it may be extended the private sector workers as well.
Estimated ROI on Best Tax Saving Investments 2019-20
If you invest Rs. 1.5 lakh (the investment limit u/s 80C on the IT Act) in the above list of tax saving investments for 2019-20, your expected returns will be as follows:
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|Tax-saving Instrument||Expected Rate*||Amount after 5 yrs|
*Expected ROI is Based on current rates/historical returns, as appropriate. Actual rates may vary.
|Fund Name||1 Year Returns||3 Year Returns||5 Year Returns||AUM|
|Aditya Birla Sun Life Tax Relief 96||7.13%||14.83%||11.54%||₹ 8,912.66 crore|
|Axis Long Term Equity Fund||15.27%||19.21%||13.2%||₹ 19,817.3 crore|
|Tata India Tax Savings Fund||17.23%||17.5%||13.76%||₹ 1,873.4 crore|
|Invesco India Tax Plan||11.53%||15.52%||11.98%||₹ 869.81 crore|
|Kotak Tax Saver||13.99%||14.57%||11.03%||₹ 9,34.61 crore|
|DSP Tax Saver Fund||16.56%||15.25%||12.08%||₹ 5,642.77 crore|
|ICICI Prudential Long Term Equity Fund (Tax Saving)||12.27%||12.45%||9.4%||₹ 6,424.9 crore|
|Franklin India Taxshield Fund||7.44%||11.48%||8.96%||₹ 4,069.61 crore|
|IDFC Tax Advantage Fund||6.35%||13.54%||9.95%||₹ 2,062.88 crore|
|L&T Tax Advantage Fund||6.04%||12.86%||9.79%||₹ 3,420.69 crore|
|Motilal Oswal Long Term Equity Fund||16.29%||17.13%||-||₹ 1,388.56 crore|
|Mirae Asset Tax Saver||16.19%||19.82%||-||₹ 2,111.58 crore|
|Principal Tax Savings Fund||5.05%||11.9%||9.03%||₹ 415.33 crore|
|Reliance Tax Saver Fund||3.24%||7.08%||4.67%||₹ 1,0914.29 crore|
|SBI Magnum Taxgain Scheme||5.98%||9.84%||6.98%||₹ 7,171.41 crore|