We all want to choose financial options that will grow our investment. And it's even better if we can save on taxes at the same time.
By now, you might have already filed proof of your investment in the organization you work for. Else by March-end you can file your returns with the department of income tax where investments upto Rs 1,50,000 in certain financial instruments are exempt from income tax.
But which are the best ones to invest in so that you can get good returns as well? The government encourages options that are safer, rather than those linked with market movements, so that you have substantial savings when you retire.
Choose a mix of instruments depending on the length of time you are investing for, and if you would like higher returns with a higher risk profile. We have listed five options to help you decide:
1. Equity Linked Savings Scheme: ELSS is a smart choice if you are prepared for slightly higher risks. The risks are that your investment is subject to market fluctuations. But that apart, its a pretty good instrument. Returns are higher than other savings instruments, and the lock-in period of three years is the shortest among all tax-saving investment options. If you opt for a dividend option you can get paid even through the lock-in period. If you want to make this a regular savings option, go the monthly instalment route, or SIPs. In the long run, this option works best. "For a time horizon longer than five years, equity will give higher returns than fixed income," said Naveen Kukreja, Managing Director, PaisaBazaar.com.
2. Public Provident Fund: PPFs are a very safe way to investment, and the government encourages this to save for later years. The trade off is that returns are lower at 8.7 percent, and the lock-in period is 15 years. The interest rate is fixed by the government every year and variations if any are marginal. You can withdraw part of it from the 6th year onwards. You can invest any amount from Rs 500 to Rs 1,50,000 in a year. This is one the best means to save for retirement. "This is a great option to save taxes, and for those who aren't disciplined with investing gains from equity-linked funds," said Kukreja.
3. ULIPS: Unit Linked Insurance Plan (ULIP) carry high charges for short term, so it would make more sense to use them as a long term investment. Make sure you can pay the premium for the full term before buying. There are no guaranteed returns, but the usual rate is higher than fixed income instruments. It also provides a risk cover. "ULIPS will give good returns, similar to ELSS, if you invest for over five years. You will get them at low expense ratios," said Kukreja.
4. New Pension Scheme: This is not as well known as PPF or Voluntary Pension Scheme but some of the NPS funds have given decent returns — close to 14 percent in 2013 for instance. There is a 50 percent cap on equity investments, to make it safer than an ELSS, and that means half of the investment will have a lower rate of return. You can choose to invest in a mix of equity, bonds and gilts, and can invest as much as you like. The minimum amount is Rs 500 per month or Rs 6,000 at one time every year. The downside is that the maturity income is taxable. However, the procedure to open an account is more complex than other such funds, but it is worth it to go through the process.
5. Bank Fixed Deposits and NSCs: This has been the age-old investment tool for millions of Indians and it remains so today. Investment in both fixed deposits and National Savings Certificate is safe, as it is guaranteed by the government in public sector banks. Earnings are low — you can earn interest in the range of 8.5-9.5 percent range for FDs and 8.5-8.8 percent for NSCs — and the main purpose is safety of your funds. Also, the interest you earn is fully taxable. It does score on convenience — FDs are available at all banks, and NSCs at all post offices, and opening one is easy.