5 Tax-Saving Investment Avenues For Conservative Investors

We are in the last leg of the tax-saving season, and I'm sure many of you are considering various tax-saving investment options.

But before you invest your hard-earned money in investment instruments that make you eligible for a deduction upto a sum of Rs 1.50 lakh under Section 80C, assess your risk-taking ability. This is because not all instruments may be best suited for you.

For example, an Equity Linked Savings Scheme or ELSS (also known as a tax saving mutual fund) isn't for you if you do not have the stomach for high market-linked risk. Similarly, allocating to the equity portfolio of a Unit Linked Insurance Plan, (an insurance-cum-investment avenue), may be inappropriate if you aren't willing to assume high risk.

[Read: The Best ELSSs (Tax Saving Funds) For 2019]

Speaking of National Pension System (NPS) and Pension Funds, while they are an effective medium for your retirement planning, don't forget that returns clocked by these instruments are market-linked. Depending on the allocation of funds---whether a dominant portion is parked to equity or debt---it would determine how risky these investments could be and the returns you would clock. So, asset allocation based on your risk profile, financial health, investment objectives, and investment time horizon is everything!

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If you are averse to taking risk (a conservative investor) and want to earn assured returns from a tax-saving instrument, these are your options:

  1. Public Provident Fund

    The Public Provident Fund or PPF is a scheme is framed under the Public Provident Fund Act, 1968 and is a government-backed long-term saving scheme. It is one of the safest investment instruments---the money invested in a PPF account remains safely yours for life! For this reason, PPF is one of the most popular investment avenues in India today, not only for tax planning but even for retirement planning.

    PPF enjoys a favourable tax status, i.e. Exempt-Exempt-Exempt (E-E-E). This means, contributions are eligible for tax deduction under Section 80C, the interest earned is tax-free, and maturity proceeds are exempt from tax.

    However, money invested in PPF is subject to a lock-in period of 15 years. During this tenure, you earn a decent tax-free rate of return (currently 8.0% p.a. compounded annually) and withdrawals are tax-free. The lock-in, in a way, is good to compound your wealth -particularly when you aim to plan for the golden years (your retirement). That said, also consider your liquidity needs when you invest.

    The minimum that can be invested in PPF is Rs 500, while the maximum is Rs 1.50 lakh in a financial year. You have a choice to invest a lump sum or in 12 instalments.

    A PPF account can be opened at your nearest post office or bank in your own name as well as on behalf of a minor vide cash or cheque deposit. However, as per the PPF rules, a joint account cannot be opened.

  2. National Savings Certificate

    The National Savings Certificate or NSC is another small saving scheme, floated by the Government of India. Like PPF, the NSC is also amongst the preferred tax saving instrument for conservative investors.

    NSC comes with a 5-year tenure and the minimum investment required is Rs 100 (and in multiples of Rs 100) and there isn't an upper limit. Currently, NSC offers interest @ 8.0% p.a. compounded annually.

    The interest income accrued annually also qualifies for a deduction under Section 80C in the respective financial year (subject to the overall limit of Rs 1.50 lakh p.a). However, the interest earned on NSC is subject to tax deduction at source as per provisions of Section 194A of the Income Tax Act, 1961.

    The NSC certificates can be held in your own name (single), jointly by two adults, or even by a minor (through the guardian).

  3. Tax Saver Bank Fixed Deposit / 5 Year Post Office Time Deposits

    A 5-year Tax Saver Bank Fixed Deposit is another worthy option. However, it comes with a lock-in period of 5 years. This means you cannot prematurely encash/liquidate/withdraw before the completion of 5 years from the date of receipt. But to compound wealth safely and steadily, the lock-in works in your favour.

    The minimum amount you can invest in a 5-year Tax Saver Bank FD is Rs 100 or in multiples thereof, with an upper limit of Rs 1.50 lakh in one financial year. The rate of interest varies across banks.

    You have three investment options: Tax Saving - Reinvestment Deposit; Tax Saving - Quarterly Interest Payout; or Tax Saving - Monthly Interest Payout; choose the one most suitable for you as per your cashflow needs.

    The deposits can be held in a single name, or jointly (by two adults or by an adult and a minor). However in case of joint holdings, the Section 80C deduction benefit is available only to the first holder who should be a PAN (Permanent Account Number) holder.

    Similarly, a 5 Year Post Office Time Deposits (POTDs) also offers you a tax benefit under Section 80C.

    The minimum investment amount is Rs 200 and there isn't any upper limit. However, similar to other tax saving instruments, the investment amount over Rs 1.50 lakh will not be eligible for any tax benefit.

    You can open the account either in a single name, or jointly, or even in the name of a minor (through a guardian) who has completed 10 years of age.

    The interest earned on both, 5 Year Tax Saver Bank FD and POTD, is subject to tax deduction at source as per provisions of Section 194A of the Income Tax Act, 1961.

  4. Sukanya Samriddhi Yojana

    The Sukanya Samriddhi Yojana (SSY), a Government of India scheme, (launched as a part of the 'Beti Bachao Beti Padhao' campaign by the Modi-led-NDA government) is a worthwhile proposition to plan for your daughter's future needs, for example, her education and/or wedding expenses.

    The SSY Account account can be opened at your nearest post office or designated bank. This account can be opened by you, the parent or guardian, any time between the birth of a girl child and till she attains 10 years of age.

    The minimum investment amount is Rs 1,000 (and in multiples of Rs 100), while the upper limit is Rs 1.50 lakh in a financial year. Every financial year, a minimum deposit of Rs 1,000 to SSY Account is must or else the account will get inactive.

    Currently, SSY Account earns interest @ 8.5% p.a. compounded annually, and like PPF enjoys a favourable Exempt-Exempt-Exempt (E-E-E) tax status.

    The SSY Account matures on completion of 21 years from the date of opening the account. On completion of 18 years of age, your daughter can operate her SSY Account by herself.

    However, if your daughter gets married before the completion of 21 years of age, say at the age of 18, then the operation of the account shall not be permitted. Normal premature closure will be allowed after completion of 18 years and provided she is married. To know more about the SSY Account, click here.

  5. Senior Citizen Savings Scheme

    The Senior Citizen Savings Scheme or SCSS is a Government of India scheme for the empowerment and financial security of senior citizens (60 years or more in age). Individuals who have attained 55 years of age and retired under a voluntary retirement scheme are also eligible to enjoy the benefits of this scheme.

    An SCSS account can be opened at your nearest post office or any nationalised bank either in a single name or jointly along with your spouse. Only a one-time deposit is permitted under this scheme subject to the minimum investment amount of Rs 1,000 and a maximum of Rs 15 lakh.

    Currently, the SCSS is offering interest @ 8.70% p.a. compounded quarterly and payable on the first working day of April, July, October, and January every year from the date of deposit. The interest earned will be subject to tax deduction at source as per provisions of Section 194A of the Income Tax Act, 1961.

Notwithstanding the above, the insurance premium paid towards a life insurance policy also qualifies for deduction under Section 80C. However, when you approach insurance, avoid comingling it with investments---keep the two separate. Remember, the very purpose of life insurance is to indemnify risk to life, and not 'investment'. Hence, for optimal life insurance coverage, consider only pure term life insurance plans. A pure term insurance plan addresses financial protection (the death benefit) by offering high life insurance coverage at low premiums.

To conclude...

Section 80C of the Income Tax Act, 1961 is the most sought after for tax planning. But make it a point to choose your tax-saving investment instruments in congruence to your risk profile so that it compliments well with your investment activity.

Happy Tax Planning!

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Author: Rounaq Neroy