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5 Short-term Investment Ideas for Availing Tax Benefits

dateKnowledge Centre Team dateApril 30, 2021 views231 Views
5 Short-term Investment Ideas for Availing Tax Benefits

Short-term investment plans help you get good returns by investing in either low-risk or easily liquifiable financial products. Long-term investments generally have a high equity allocation in the initial period and skew towards bonds, G-secs, and other debt instruments towards the latter period. The decision to invest, the duration, etc (for short-term or stay put for a long run) depends on the individual’s needs, risk appetite’s, objectives, and benefits.

If you are looking for short-term investment options, consider the following factors first:

A. Investment Objective: Your goal should be clear to decide the amount and type of investment. Say, your child will reach Class 12 in four (4) years from now and you want to save money for his fees to study engineering or management or medical.

B. Risk Appetite: Are you comfortable taking risks? Market-linked investment plans come with some amount of risk. Fund managers try their level best to ensure your principal amount is not only safe but also grows over time.

C. Financial Requirements: When do you need the money? Are you comfortable if the investment is locked in for five (5) years? Do you have other contingency funds in case of an emergency? Do you require periodic interest inflows, or can the interest be reinvested to grow the corpus further?

D. Sum Assured: If you are opting for tax-saving plans to avail tax benefits under section 80C, then you can look at Unit Linked Insurance Plans (ULIPs) that offer tax benefits, life cover as well as returns on investment. If the financial return on investment is not a primary objective, you can explore top health insurance plans that give you financial protection during hospitalization and save tax as well. The best health insurance plans with comprehensive coverage should accommodate hospitalization costs and also give away lumpsum amounts for terminal illnesses.

Once you have defined your investment plans as recommended above, it is time to evaluate different financial instruments. These 5 (five) investment options are the most popular and therefore you can look at them as safe bets to park your hard-earned money. These are also some of the best tax-saving investments in India:

1. Equity Linked Savings Scheme (ELSS)

ELSS has the shortest lock-in period amongst all 80C category financial products. ELSS is a robust investment option for growth as almost 65% of the amount is allocated to equities and the rest goes to fixed income securities.

2. Unit Linked Insurance Plans (ULIPs)

ULIPs provide the best of both worlds. Some portion, called mortality charges, of your investment goes towards life insurance and the rest is invested in equity or debt instruments depending on your investment goals and time horizon.

Systematic withdrawals after five years help tide over temporary financial setbacks. Invest 4G by Canara HSBC Oriental Bank of Commerce Life Insurance goes one step further. When the policy terminates, the deducted mortality charges are added to the fund value. In case of untimely demise, the savings contributions can continue without interruption.

ULIPs for planning your retirement

Additionally, the ULIP provides automatic portfolio management for aggressive investors and bonus additions for long-term investors. These strategies will help you manage your portfolio without looking into it regularly. Bonus additions help grow your ULIP’s fund value faster.

3. National Savings Certificate (NSC)

NSC is a safe investment backed by the Government of India. Offered at Post Offices, NSC currently generates an annual 6.5% rate of interest. NSC is not a wealth creator and does not deliver inflation-beating returns.

But its safety and accessibility make it an attractive buy. The lock-in period is for 5 years. NSCs can be pledged as collateral to avail loans from Banks and Non-Banking Financial Companies (NBFCs). This instrument is popular because of its availability across the breadth and length of the nation.

4. Senior Citizens Savings Scheme (SCSS)

Retirement planning is essential. A government-backed investment option exclusively designed for senior citizens. Retired citizens can invest their retirement benefits into this scheme and also avail tax benefits under section 80C. The maximum amount that can be invested is lower of retirement benefits and Rs.15Lakhs.

Retirement Benefit Maximum Amount Investible Amount
Rs.10Lakhs Rs.15Lakhs Rs.10Lakhs
Rs.25Lakhs Rs.15Lakhs Rs.15Lakhs

Say, Surendra retires and takes home Rs.10Lakhs towards retirement benefits. The maximum amount that he can invest in SCSS is only Rs.10Lakhs. In the next scenario, if Surendra’s retirement benefit is Rs.25Lakhs, he can invest up to Rs.15Lakhs. The tenure of investment is generally 5 (five) years, extendible by another 3 (three) years.

Learn these 5 reasons you should buy a retirement and pension plan.

5. Tax Saver Fixed Deposits (FDs)

If you are looking for a risk-free investment along with monthly or quarterly interest pay-outs, 5-year tax-saving FDs are a good match. These FDs are offered by most scheduled commercial banks. Some banks also allow opening such FDs using Net Banking. You can enjoy the advantage of the power of compounding if you opt for re-investment of interest until the maturity of the deposit.

These 5 (five) options have benefits and advantages unique to each product but all of them are eligible for tax deduction under section 80C of the Indian Income Tax Act. You must evaluate each option against your personal financial goals and opt for the most appropriate one.

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FAQs Related to Tax Saving

First of all, your gross total income is taken into account and all applicable deductions/exemptions are deducted out of it, the resultant amount is the net income, upon which the Income Tax is calculated, on the basis of income tax slabs that are announced each year in the Union Budget.

How much tax you can save depends on your financial portfolio and profile. The most common avenue for tax-saving is Section 80C, which allows you deductions up to Rs 1.5 lakh in your taxable income. The implication is that you can save up to Rs 46,800*in taxes in a year, depending upon the income tax slab you belong to. Similarly, other avenues like interest on loans, health insurance etc also provide deductions capped at a certain amount.

*Tax saving of Rs.46,800/- is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on life insurance premium of Rs.1.5 lakh, who is having taxable income upto Rs.50 lakhs.

You can choose from many investments that are tax-exempt: not an exhaustive list, but includes Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), life insurance plans, Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), tax-saving bank FDs.

First of all, make investment of Rs 1.5 lakh in investments instruments covered under Sections 80C to reduce your taxable income. Claim deductions for the interests paid on home loan and/or education loan if any. Get a health insurance policy and claim for other medical expenditure like preventive medical healthcare check-up, expenditure on rehabilitation of handicapped dependent relative, among others. Mainly, the idea should be finding out which tax saving avenues fit well with your larger financial goals and invest in them!

The maximum limit of investment that will reap the benefits of deduction from taxable income under Section 80C is Rs 1.5 lakh.

There is no limit to the number of tax-exempt investments one can have in a financial portfolio. However, it is important to note that there is a limit to how useful any instrument can be for the purpose. This is because the amount of deduction that can be claimed for specific instruments is capped at a maximum value. At the same time, keep your financial portfolio balanced so that it also provides safety, returns and liquidity.

First of all, make use of the Rs 1.5 lakh deduction allowed under Section 80C. This can be done by making investments in life insurance premium, Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), among others.

Second, make use of the deductions available in respect of health insurance and other medical expenses. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of Self and your family i.e., Spouse and children. This can include preventive healthcare check-ups too upto Rs 5000/-. Under section 80D you can also claim additional deduction upto Rs. 25000/- (Rs. 50000 in case of senior Citizen) for health insurance of your parents.

Apart from Section 80C, various deductions and exemptions has been provided under the provision of Income Tax Act, 1961 like deduction under section 80D can be claimed for the payment of health insurance, deduction upto Rs 50,000 on home loan interest under Section 80EE. Any donations you make to charitable institutions are also allowed as deduction under Section 80G, subject to condition prescribed therein.

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