Short-Term Investment option for Availing Tax Benefits
Life has a habit of throwing up surprises; the least we can do is be prepared for such uncertainty. When it comes to finances, our savings help us tide over distressing times. But, as a fact, not many people get returns as per their expectations. And, with so many advertisements around us, it is easy to get confused.
This article demystifies the top-5 short-term investment options that can help you generate nice returns and save taxes in the process.
- Fixed Deposit
First thing first – Indian investors rely on fixed deposits more than any other instrument. The following three reasons make fixed deposits so popular:
- High Rate of Interest
There are two types of fixed deposits – Bank FDs and Housing Finance FDs. Housing finance companies generally offer the highest FD interest rates, as unlike banks, they cater exclusively to the high-growth housing industry. You may open an FD for any duration from 7 days to 10 years.
- Tax Benefits
Fixed deposits offer excellent tax benefits. Many banks offer Tax Saver FDs, which allow you to save taxes of up to Rs. 1.5 lakh every year. However, the lower interest rate offsets the impact of tax gains. Housing finance FDs, on the other hand, offer TDS benefits of up to Rs. 5000 and the highest FD interest rates leave you with more cash in hand on maturity.
Fixed deposits are liquid, which means you can withdraw the full amount before maturity by paying a small penalty. Very few short-term investment options allow this flexibility. However, if you invest in a tax-saver FD and close the account prematurely, you cannot claim tax deductions.
- Equity Linked Savings Scheme (ELSS)
ELSS is subject to capital market risks but can generate higher returns than any other medium. Mutual Fund ELSS schemes have a lock-in period of three years and invest primarily in stocks. You may avail tax benefits under Section 80C for an amount of up to Rs. 1.5 lakh. Click here to learn more about mutual funds before you decide to invest in ELSS schemes.
- Rajiv Gandhi Equity Savings Scheme (RGESS)
RGESS is a scheme for first-time capital market investors with an income below 12 lakh per annum. By investing in this scheme, you can take advantage of stock price fluctuations and generate higher returns. It allows you to save taxes up to Rs. 50000 under Section 80CCG for three years, over and above deductions under Section 80C.
- Life Insurance Policies
Most life insurance policies offer tax benefits under Section 80C. They also offer life cover up to a certain amount. However, the post-tax returns from a life insurance product can be substantially lower than the returns generated through FDs that offer the highest interest rates.
- Debt Mutual Funds
Mutual Funds that invest in debt instruments are generally safer than equity; however, the returns can be lower than equity as well as many CRISIL FAAA-rated fixed deposits. Although debt mutual funds do not directly provide tax benefits, Unit Linked Insurance Plans (ULIPs) that invest in debt instruments can help you save on taxes.
As is evident from the discussion above, no other option is as safe as a fixed deposit, when you are looking at capital appreciation over a short-term.