Tax-saving investments for the financial year ended March 31, 2020 can be done till July 31
The tax department is on an extension granting spree. Now, tax-saving investments for the financial year ended March 31, 2020 can be done till July 31. The government has left interest rates on small saving schemes unchanged. You should consider investing in some of the attractive options and achieve the twin objective of tax saving and earning good returns.
Conservative investor? Go for safety first
If you don’t want to take risks, the National saving certificate (NSC) available at your post office is a suitable option. At an interest rate of 6.8 percent, NSC is an attractive tax saving option even in times of falling interest rates. This instrument has a five-year lock-in. If Rs 10000 is invested, it grows to Rs 13890 at the end of the term.
As it is issued by the government, it comes with almost no credit risk. Sums invested in NSC of up to Rs 1.5 lakh per year are eligible for deduction under section 80C of the Income Tax Act.
Other options include public provident fund (PPF), Sukanya Samriddhi Yojana (SSY), Employee Provident Fund, senior citizen saving scheme (SCSS) and equity linked saving schemes (ELSS).
You don’t get a monthly income from the NSC. But the interest payable on the NSC is deemed to be re-invested and qualifies for Section 80C tax deduction benefits of the Income Tax Act. And, you can claim deduction in the subsequent years – for four years – as well.
“SSY and PPF offer better returns but come with long lock-in periods. If you are not keen on investing for long, then look at the NSC, as it offers superior returns than comparable options offering assured returns,” says Pankaj Mathpal, founder and CEO of Optima Money Managers.
Five-year tax saving bank deposits offer around 5.4 per cent rate of interest. Senior citizens get 6.2 per cent. You can also raise loans against the NSC, if need be.
SCSS works for senior citizens
The senior citizens can earn more than NSC if they invest in the SCSS. It offers 7.4 per cent interest, payable quarterly. Though you can invest Rs 15 lakh totally in this scheme, you can claim deduction of up to Rs 1.5 lakh for an investment made in a financial year.
SCSS offers an opportunity to earn a regular income along with tax benefit, without compromising on the safety of your capital.
But what if you are willing to take some risk for higher returns compared to assured return products. You can consider investing in equity linked saving schemes.
Tax-saving funds for risk-return rewards
ELSS or tax saving funds as they are popularly known, invest in equity shares of companies. The investments are locked in for a period of three years, though it is not mandatory to sell after you complete three years. Also if you are investing in equity mutual funds (including tax saving funds) you should be prepared to hold on for at least five years, if not for longer periods.
According to Value Research, tax saving mutual funds have given 4.33 and 9 per cent returns over last five and ten year periods on an average as a category. “Looking at the returns in the recent past, ELSS does not look attractive, but if you have long enough time frame, then there is a fair chance that you will make good risk-adjusted return as economy recovers and corporate earnings grow,” says Mathpal.
Given the time constraint (July 31), you can consider lump-sums.
In general, if you invest in a systematic manner in ELSS, each SIP installment will have a three-year lock-in.