“To be rich, you have to make money while you sleep!”
Our idle money normally finds its way to bank fixed deposits (FDs), especially after the ease of creating them (by just a few clicks on the bank’s website). However, post-tax returns on this are less than even 5% – they do not even come close to beating inflation! So, are there better, smarter alternatives? Thankfully, yes!
If you have still not parked your money or completed your tax planning, don’t worry! Here’s a list of few options identified for you, evaluated on the basis of various key parameters, such as, returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income.
PPF and VPF
The Provident Fund (PF) is a safe way to save tax. Although an individual’s contribution to the PF is linked to the salary, one can increase the amount by opting for the Voluntary Provident Fund (VPF). For investors not covered by the PF, the Public Provident Fund (PPF) can be a suitable alternative. The interest rate is 8.65% for FY 16-17 (changes each year), but remains ahead of inflation. Also, the interest amount is entirely tax free, and the contribution to PF is allowed as a deduction (u/s 80C) against taxable income.
However, with the interest rates falling, it is likely that PF rates will come down as well. Still, they may continue giving better rates than traditional FDs.
A ULIP (Unit-Linked Insurance Plan) is a combination of insurance and investment – it is a life insurance product, which provides risk cover for the policy holder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds. Being insurance policies, income from these plans is tax free (u/s 10(10D)). Aggressive ULIP plans have earned almost 12% annualized returns in the past five years.
The National Pension Scheme (NPS) is a good investment option to save tax if you don’t mind locking in your money till you retire. NPS is especially useful for investors who may have exhausted the Rs.1.5 lakh investment limit under Section 80C but want to save more. They can cut their tax further if they put Rs. 50,000 in the pension scheme. In the past 5 years, the return from this category has been 12.5%.
ELSS is one of top investment choices because of the phenomenal returns they have generated in the past and their enormous potential even today. It refers to Equity-Linked Savings Schemes. This category of investments has generated 18.69% annualized returns in the past three years and 17.46% in the past five years. ELSS funds also score high on costs, transparency, taxability and liquidity. Returns are tax free because long-term capital gains from equity funds are exempt. These funds have the shortest lock-in period of three years. And the best way to invest in these funds are through SIPs, or Systematic Investment Plans, breaking up the investments monthly so as to average out the costs, and minimize effects of price fluctuations.
According to ‘Value Research’, the top 5 ELSS Funds are:
- Axis Long Term Equity Fund
- Birla Sun Life Tax Relief 96
- DSPBR Tax Saver Fund
- Franklin India Taxshield Fund
- Invesco India Tax Plan
So, before 31st March, choose your investment option and plan your investments wisely so as to optimize returns on your money!