As the financial year (FY) 2023-24 approaches its conclusion, it’s crucial for individuals to undertake effective tax planning. There’s a myriad of investment options available to save on taxes while aiming for respectable returns.
Prior to selecting an investment instrument, investors should assess their risk appetite, investment objectives, and time horizon. Constructing a portfolio should prioritize capital safety and maximizing returns based on individual risk tolerance, with diversification across asset classes aiding in risk management.
Under Section 80C of the Income-Tax Act (ITA) 1961, various investment options exist for tax savings, categorized based on risk levels. Low to moderate-risk options typically provide capital safety but yield lower returns, ranging from 6% to 8.5%, roughly matching inflation rates.
For investors, the goal is to allocate sufficient funds to ensure capital safety in these instruments while pursuing higher returns elsewhere. Options in this category include:
- Public Provident Fund (PPF): A government-backed savings scheme with a fixed interest rate.
- Employees’ Provident Fund (EPF): Managed by the government, offering a fixed interest rate.
- National Savings Certificate (NSC): A low-risk investment with a fixed interest rate.
- Five-year fixed deposit (FD) with a bank: Tax-saving FDs typically offer fixed interest rates.
- Senior Citizens Savings Scheme (SCSS): Relatively safe with the highest interest payout, but capped for investors above 60 years of age.
- Sukanya Samriddhi Yojana (SSY): A safe option with a fixed interest rate for girl-child savings.
For those with a higher risk appetite, moderate to high-risk tax-saving options may be considered. These options include:
- Equity-linked saving scheme (ELSS): Investing in the equity market with potential for higher returns but associated with market-related risks.
- National Pension System (NPS): Allowing equity exposure with varying risk levels based on investor preferences.
- Life insurance: While traditional plans offer low returns and minimal risk, unit-linked insurance plans (ULIPs) involve market-related risks.
It’s important to note that market-linked investments such as ELSS and NPS are subject to market risks and may test investor patience while offering returns. Additionally, beyond Section 80C, other sections under the ITA provide further tax-saving opportunities to investors.