As March approaches, many people wake up to the challenge of saving taxes before the month-end. Like every year, they start consulting friends and colleagues about where to put their money.
The popular choices under section 80 C, which allows you to invest up to Rs 1 lakh, are National Savings Certificate, Public Provident Fund, Post Office term deposit and bank fixed deposits, among others. Some intrepid ones also opt for Equity-Linked Tax Savings Scheme (tax saving schemes from mutual funds).
However, according to financial advisors, many people are clueless about how to choose the right investment because they are not aware of the returns and their tax treatment. "Most people are not aware of the lock-in period, returns and the incidence of tax on returns on the investments permitted under Section 80 C. They end up picking up the wrong products and regret it later,'' says a financial advisor.
The first step to pick the right product is to ask yourself whether you prefer a fixed rate of return with more safety or market-related return with more risk.
If you want fixed rate of return, you should go for the usual NSC, PPF, Bank FD, and so on.
However, if you can take more risk to earn better returns from stocks, you should pick up ELSS.
Lock-in period of investment to claim tax benefit
The next is to find out how many years you are willing to lock in the investment to claim the tax benefit.
As you can see from the table, ELSS has the least lock-in period, whereas PPF has the highest lock-in period of 15 years.
Others fall in between. Depending on your willingness to wait, take your pick.
Rate of return offered
The next factor to consider is the rate of return offered by them.
According to financial advisors, ELSS has the potential to offer highest return, but it is recommended only for people who can afford to take risk.
"On the fixed income category, the returns range within 8-8.5%, but tax-saving schemes have the potential to give 12%. Of course, it is not guaranteed,'' says a financial expert.
How the returns are taxed?
The most crucial part is to look at how the returns are taxed. Only PPF and ELSS offer tax free returns, whereas interest earned on NSC, Post Office term deposits and bank FDs is taxed.
"At the moment, bank FD is a better option that NSC as banks are offering interest rate of 8.5% on FDs.
Also, bank FDs have a lock-in of only five years,'' says a senior banker.