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19-10-2022 | 8min
Nowadays, you may be quite familiar with different investment options and the tax* benefits they offer. But are all investments the same, and will they all offer tax* savings for your benefit? The only way to find out is to consider all tax saving investment plans.
Many short-term investment plans in India offer apt returns, but these also carry some risks that may not appeal to all types of investors. To understand which investments you should opt for, here is what you should know.
Some Short-term Tax-saving Investments
- Unit-Linked Investment Plan (ULIP)
Though a Unit-Linked Investment Plan (ULIP) has a lock-in period of 5 years, it can be considered a short-to-mid-term investment plan. The main benefit of a ULIPis that it offers investment and life insurance under the same policy and with a single premium payment for both components. You can also choose from different fund options to balance your portfolio.
Under Section 80C of the Income Tax* Act, you can claim tax* deductions up to ₹1.5 Lakh on the policy premiums each year. Moreover, the death benefit offered under the life insurance coverage is exempt from tax* under Section 10(10D) of the Income Tax* Act.
- Debt-Based Mutual Funds
Debt-based mutual funds are generally preferred for their investment in instruments that offer a fixed interest and capital appreciation, as predetermined by the issuer of the funds. These funds invest in government securities and corporate bonds. Short-term debt funds can offer tax* benefits where you can avoid paying a 15% capital gains tax* on your returns if you do not redeem your investment before the end of one year.
But it is important to note that the short-term capital gains will be compulsorily taxed as per applicable rate., and you cannot avoid this taxation.
- National Saving Certificate (NSC)
The NSC is a short or medium term tax saving investment plan in savings bonds, suitable for less-risk investors. You can open an NSC account at your nearest post office, either on an individual basis or as a joint account with another person. Investing in National Saving Certificate helps you claim a tax* deduction of up to ₹1,50,000 under Section 80C of the Income Tax* Act. Moreover, there is a fixed interest rate of 6.8% per annum on this investment.
For the NSC to be a short-term investment option, you should choose a maturity period of 5 years on the scheme instead of 10 years.
- Senior Citizen Saving Scheme (SCSS)
The SCSS helps senior citizens in India above the age of 60 years save money for their retirement. This short-term investment plan comprises an account that is opened at a bank and or a post office. If you are a senior citizen, you can claim a tax* deduction of up to ₹1,50,000 under Section 80C of the Income Tax* Act.
As the maturity period of SCSS is 5 years, it is among the most suitable short-term investment plans for the elderly citizens of India. Once the maturity period is over, the account offers a source of income for the retired person and their family.
- Equity Linked Saving Scheme (ELSS)
ELSS is the only equity-linked scheme that offers tax* benefits under Section 80C. The diversified investment comes with a 3-year lock-in period and is a short-term tax saving investment. Many people invest in Equity Linked Saving Scheme mainly to invest in equities and enjoy a short investment tenure for their short-term goals. Apart from the income tax* benefits, ELSS also offers capital appreciation.
ELSS funds, being equity funds, carry certain risks which may not be suitable for everyone and all types of investors. Hence, before you opt for an ELSS fund, be sure to check your risk profile.
How to Choose from Various Short-Term Investments?
As an investor, you may and should have some important considerations before you narrow down on one or few short-term investment options. It is important that the investment should offer tax* benefits while also helping you fulfil your short-term investment goals. Take note of the following factors before you choose some short-term investment plans:
- Your investment goals
Before you start any investment, plan your investment goals. Since your short-term investment goals need to be fulfilled in the next few years, your investment should be able to offer you the apt returns within that period. It is important that your goals and the investment’s maturity are aligned.
- The investment limit.
Since you need a desired amount of funds within the short term, opt for investments that allow you to invest a large sum of money which will then appreciate over the next few years. Find out which investments allow you to invest with a lumpsum amount.
- Your risk appetite
Most investors select investment options only after checking if the option is in sync with their risk profile.
- Your financial needs
Just like your goals, you will need to chalk out what your financial needs are before you invest in any instrument. This will help you understand how much money you need to fulfil any financial obligations. Also, be sure to consider the financial needs of your family before making any investment.
Conclusion
One may be wary of short-term investment plans because of the popular notion that only long-term investments are reliable. However, not all short-term investments are risky; in fact, the list mentioned above also offers tax* benefits which makes it easier for you to choose a suitable investment plan for your needs.
L&C/Advt/2022/Oct/2583
