As the financial year (FY) 2023-24 approaches its end, it’s essential for individuals to engage in optimal tax saving. There are numerous investment tools available that not only help in saving tax but also offer respectable returns. However, before selecting an investment instrument, it’s crucial for investors to consider their risk appetite, investment goals, and time horizon.
Constructing a portfolio of investments should prioritize the safety of capital while aiming to maximize returns based on individual risk appetite. Risk appetite varies from person to person, leading to different investment portfolios. However, it’s important to note that with low risk appetite, returns are likely to be lower. Diversifying across different asset classes can help balance risk and returns.
Under Section 80C of the Income-Tax Act (ITA), 1961, there are various investment options available for tax savings. These options can be categorized based on the risk they carry, ranging from low to moderate risk and moderate to high risk.
Low to Moderate Risk Options:
These options provide safety of capital but yield lower returns, typically ranging from 6-8.5%. Considering the current inflation environment, these returns may just about match the erosion of returns caused by inflation. It’s advisable for investors to allocate just enough capital to ensure safety in these instruments while aiming for higher returns with the rest of their investments.
Public Provident Fund (PPF): A government-backed savings scheme offering a fixed interest rate, currently at 7.10%.
Employees’ Provident Fund (EPF): Contributions managed by the government with a fixed interest rate of 8.15%.
National Savings Certificate (NSC): A low-risk investment tool with a fixed interest rate of 7.70%, compounded annually.
Five-year fixed deposit (FD) with the bank: Tax-saving FDs typically offer a fixed interest rate.
Senior Citizens Savings Scheme (SCSS): Offers a relatively safe investment option with the highest interest payout of 8.20%, with a cap of Rs 30 lakh for investors above 60 years of age.
Sukanya Samriddhi Yojana (SSY): A safe option with a fixed interest rate for a girl-child, redeemable when the child turns 18.
Moderate to High Risk Options:
For investors with a higher risk appetite, tax-saving options include:
Equity-linked saving scheme (ELSS): Investing in the equity market, ELSS has the potential for higher returns but is associated with market-related risks.
National Pension System (NPS): Allows for equity exposure, subjecting it to market risks. However, it also includes debt and government securities, reducing overall risk. Investors can choose their desired equity exposure level.
Life Insurance: While traditional plans offer low returns and carry low risk, unit-linked insurance plans (ULIPs) have market-related risks. It’s important to note that returns from market-linked investments such as ELSS and NPS are subject to market risks, requiring patience from investors while yielding returns. Additionally, life insurance, while not strictly an investment, carries its own set of risks and returns.
Apart from Section 80C, which provides deductions for various investments and expenses, other sections under the ITA offer tax-saving opportunities to investors as well. By carefully considering risk and return profiles, investors can make informed decisions to optimize their tax savings and investment outcomes.
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