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INVESTMENTS WHICH ARE BEST SAVING SCHEMES IN INDIA

When it comes to investments, most of you want the best returns as well as tax saving. Moreover, different types of investments have a different risk profile. Some are risky and do not promise the returns while under some the returns are promised at the time of investment. There are different types of investment tools available in the market and you should choose from these avenues based on the following factors –

• Financial goals
• Investment horizon
• Tax planning
• Risk appetite
• Returns expectation

Despite the innumerable investment options available in the market, here is a list of some of the best saving schemes in India –

• Fixed deposits

Fixed deposits are very popular with the Indian masses because they promise guaranteed returns and are a safe mode of investment. Thus, individuals looking for fixed income instruments often choose fixed deposit schemes of banks and financial institutions. You can deposit any amount of money for any period of time. After the deposit tenure is over, you get a maturity value which is the aggregate of the money that you had invested and the returns earned thereon. Returns range from 3% to 8% and there is no limit on the amount of deposit. Moreover, if you choose Tax Saver 5-year fixed deposit schemes, you also get deduction on the invested amount under Section 80C of the Income Tax Act. Interest received from the Fixed Deposits are taxable.

• Recurring deposits

Another type of fixed income instruments, under recurring deposits you deposit a specific amount every month / periodical payments for a specified number of months. This scheme is good for small investors who want to invest in a disciplined manner every month. The interest rate is slightly lower than fixed deposit rates but it gives you flexibility to invest small amounts regularly.   Interest received from the Fixed Deposits are taxable.

• Public Provident Fund (PPF)

PPF investments are very popular with the general masses as it gives fixed returns and also tax benefits. The amount invested is allowed as a tax-free investment under Section 80C. Moreover, the returns earned and the maturity proceeds are also completely free from tax. PPF investments are suitable for long-term investors as the lock in period is 15 years. However, partial withdrawals are allowed from the fund after the completion of 5years.

• National Saving Certificate (NSC)

NSC is another fixed income saving avenue which gives you guaranteed returns. You can invest any amount in NSC and the deposit tenure can be chosen from 5 years to 10 years. Investments into NSC are allowed as a deduction under Section 80C but the interest earned is taxable in your hands. Reinvestment of the interest is also eligible for the purpose of deduction under Section 80C.

• Mutual funds

Mutual funds are gaining popularity because they allow you to diversify your portfolio and cut down on market risks. Moreover, mutual fund schemes come in different variants and you can find a scheme which matches your risk appetite. Equity oriented funds are for those who don’t mind taking risks and expect high returns. Debt oriented mutual funds, on the other hand, are for those who are risk-averse and want moderate returns. You can invest in mutual funds in one lump sum or in monthly instalments through Systematic Investment Plans (SIPs).

• Equity Linked Saving Scheme (ELSS)

ELSS schemes are a type of mutual fund schemes which are one of the best saving schemes in India. ELSS schemes are equity oriented mutual fund schemes which promise good returns. Moreover, you can also enjoy tax saving benefits as the investments qualify as a deduction under Section 80C. Returns earned from long term equity oriented mutual funds, including ELSS  are taxed @10% if they exceed INR 1 lakh. Dividends received from the mutual funds are exempt.  ELSS schemes, unlike other mutual fund schemes, also have a lock-in period of 3 years during which you cannot withdraw or redeem the fund.

• Post office monthly income schemes

Post office monthly income schemes are deposit schemes which promise fixed returns. The returns that you earn on your investment is calculated and paid every month thereby creating a monthly income for your financial needs.

• National Pension Scheme (NPS)

The National Pension Scheme was introduced by the Government of India in order to promote retirement funding among individuals. This scheme is a retirement oriented investment scheme which helps you in creating a retirement corpus. You can invest in the scheme during your active working life and when you retire, the scheme promises you pension payments throughout your life. You also get the option of withdrawing up to 60% of the accumulated corpus in cash and then using the remaining fund to receive pension payments. NPS scheme invests in the market and so, returns are not guaranteed. However, since returns are market linked, you get inflation adjusted returns which are attractive. Moreover, investment into the scheme also earns you tax benefits. When you invest in the NPS scheme, you get an additional tax deduction of up to INR 50,000 under Section 80CCD (1B). This deduction is allowed over and above the deduction limit of INR 1.5 lakhs available under Section 80C. Thus, investments of up to INR 50,000 every year into the NPS scheme would not only allow you to build up a substantial retirement corpus, it would also help you save your tax liability.

• Life insurance plans

While the purpose of life insurance plans is to provide financial security in case of premature death, there are savings oriented life insurance policies too which can help you create a saving corpus. Life insurance endowment plans, money back plans and unit linked plans help in savings. Here’s how –

a) Endowment plans – under endowment plans you can choose the sum assured and the term of the plan. Based on your age and the plan parameters that you choose, the premium is determined. You pay the premium for the chosen premium payment term. If the insured dies within the policy tenure, the sum assured along with death  benefit(if any) is paid. However, if the term of the plan comes to an end, the sum assured along with any guaranteed additions, loyalty additions or bonus is paid which gives you a saving corpus.

b) Money back plans – money back plans are like endowment plans. However, while under endowment plans the sum assured is paid in one lump sum on maturity, under money back policies the sum assured is paid in instalments over the policy duration. As such, money back policies not only help you to create savings, they also give you liquidity over the term of the plan. Moreover, money back policies are issued as participating plans where bonus is declared. The bonus additions help in increasing the corpus that is accumulated over the policy tenure.

c) Unit linked insurance plans – also called ULIPs popularly, unit linked plans are like a combination of mutual funds and life insurance. The premiums that you pay are invested in the market through diversified funds and you get market linked returns. Moreover, in case of death during the policy tenure, you are promised a death benefit. Thus, ULIPs provide an added advantage of insurance over mutual funds. Furthermore, the tax benefit cannot be overlooked. The investments made through premium payments are allowed as a deduction under Section 80C. The returns generated, the maturity benefit or the death benefit is also completely exempted from tax. So, while mutual fund returns might be taxable, returns provided by ULIPs are completely tax free.

• Shares and stocks

This investment avenue is suitable for risk taking individuals who want to book profits through trading on the stock exchange. The stock market promises attractive returns but is also volatile in nature. You can invest in the stocks of any company and if the value of the company rises, you can make a profit by selling the stock at a price higher than the one at which you bought the stock. There is no tax benefit on stock investments. Investments form a part of your taxable income and the returns that you get are taxed @10% if they exceed INR 1 lakh subject to certain conditions.

• Real estate

People invest in property not only for putting a roof over their heads but with an eye on investment too. Real estate values rise over a period of time and investors who have surplus funds at their disposal can invest in a property if its value is expected to increase. They can, then, sell the property at a higher rate to earn profits or, if it is a house or an apartment, they can rent the property and get monthly rent incomes. You can also avail tax benefits if you invest in a house through a home loan. In such cases, the principle amount of the loan which is repaid would be allowed as a deduction under Section 80C. The interest paid on the home loan, on the other hand, would be allowed as an tax benefit under Section 24.

• Gold

While gold is not strictly a saving scheme in the sense of the word, it is definitely looked upon as an investment by many. The value of gold as an asset cannot be undermined and so people often invest in gold. Moreover, gold ETFs have also gained popularity wherein you can buy and sell gold in paper form and earn a return. You can also buy gold ETFs as savings and later on exchange the ETFs for an equal weight of physical gold when you need.

• Flexible bank saving account

The saving accounts of today have been revolutionized with different features making them more flexible and suitable for creating savings. Many banks nowadays offer saving accounts with a sweep-in facility. Under this facility, your saving account is linked to a fixed deposit account. You set a trigger limit on your savings account and whenever the balance in the account exceeds the trigger, the excess amount is transferred to a fixed deposit account. Moreover, if the balance in your saving account is not sufficient for any transaction, the balance of the fixed deposit account linked to the saving account is freely available for completing the transaction. So, these flexible saving accounts with sweep in facility have many benefits. They remain flexible and allow you easy withdrawals and deposits. Moreover, as the excess is transferred to a fixed deposit account, they also promise better interest earnings.

• Bonds

Bonds are fixed interest saving schemes which are issued by the Government, public sector companies or private companies looking for funds.

So, amidst these best saving schemes in India, choose schemes which suit your requirements and investment preference. Moreover, build up a diversified financial portfolio by choosing multiple investment schemes from the above-mentioned ones so that you can minimize your risks but maximize returns.

Frequently Asked Questions:

1- What is the tax-free limit under Section 80C?

The maximum deduction which you can avail under Section 80C is limited to INR 1.5 lakhs for all the investments and expenses which are permitted under the section.

2- How are equity returns taxed?

The taxation of equity returns depend on the investment period. If you sell the equity investment within one year of buying it the returns earned would be called a short term capital gain. This gain would be taxed @ 15% irrespective of the tax slab in which you fall subject to certain conditions. Alternatively, if you sell your equity investments 12 months after buying them, the returns earned are called long term capital gains. Long term capital gains are taxed @10% only if the returns exceed INR 1 lakh subject to certain conditions. So, if you buy a  listed equity investment for INR 1 lakh and sell it for INR 1.5 lakhs after 12 months, you would get a return of INR 50,000. Since the return is below INR 1 lakh, it would be tax-free. However, if you sold the investment for INR 2.5 lakhs, the return would become INR 1.5 lakhs. In this case, a tax of 10% would be charged on the return exceeding INR 1 lakh, i.e. on INR 50,000. Thus, you would have to pay a tax of INR 5000 + Cess.

CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.