It’s that time of the year again, ‘Catch-up Investments‘ is the talk of the town. 31st March is the last date to make your catch-up investments and avail Tax Deductions on them. And amid this rush to invest and claim Tax-deductions, oftentimes, people tend to make hasty Investments.
So Let’s look at the Tax Saving Investments under chapter VI-A that one can opt for (considering the current market situation) before this Financial Year ends.
Why all the Fuss?
As you might already know, the global economy has taken a hit due to the spread of the Corona Virus. Stock Markets worldwide have been affected, global trade is declining. Apart from that, in just India 471 stocks have hit a 52 week low. This means that investors will be more tentative about making risky bets. Since November of 2019, India’s economy had slowed down. It severely impacted the Investments which were at a negative 1%.
Considering the prevailing economic condition of India, these Investment options could answer your skepticism.
Equity Linked Savings Scheme (ELSS)
Indian Markets weren’t doing exactly great until now, but ever since the unprecedented rise of Corona Virus, Indian Markets have worsened. This might translate as a ‘No-Go‘ for some people. But in reality, investing in ELSS now, especially when the markets are down, could make sense for some.
Investing in ELSS could mean that an individual would be able to buy more shares for a comparatively less price since the stocks of many companies are at all-time low prices. So, when the markets recover, the return could be better than usual. That could be a bargain…
But, it goes without saying that deep market knowledge is essential for investing in ELSS. Individuals with a low-risk appetite should refrain from investing in ELSS.
Adding on, according to Tom Orlik, the Chief Economists at Bloomberg Economics said that “The Indian economy is relatively insulated (in regards to impact from Corona Virus)”. The Indian Domestic markets are huge in their own right, so they can fend off the damage up to a great extent! Globally it is estimated that damage of $50 Billion has been done so far. Whereas India’s Losses only amount to around $350 Million. But Orlik’s statement shouldn’t be held conclusive.
However, Tedros Adhanom, The head of the World Health Organization (WHO) said, “we are in uncharted territory“. So, it goes without saying that markets might recover, or plummet even further. Hence it is advisable to tread these waters with caution!!
Individuals should research in-depth before investing in the equity of Chemical, Textiles, Automotive, and Machinery. Primarily because these industries have high contributions with the virus Infected countries. Let’s not forget you get 80C deduction up to INR. 1,50,000 on this investments.
Employee Provident Fund (EPF) & Public Provident Fund (PPF)
EPF and PPF are investment options u/s 80C of Chapter VI A. For people with a low-risk appetite, EPF and PPF are save bets to invest. PPF falls under the ‘Exempt-Exempt-Exempt‘ scheme and thus, all deposits, interests, and withdrawals are tax-exempt.
The Lock-in period in PPF is 15 years and it suits best for people who have a low-risk appetite but wish to earn medium returns. PPFs approximately yield an 8% interest, this interest can also be reinvested. PPF allows account-holders to avail of a loan facility in the 4th and 6th year out of the credit amount between the 3rd and 5th financial year.
EPF is typically 12% of employee’s contribution + 12% of employer’s contribution. A company with more than 20 employees must comply with EPF rules as per the Employee Provident Fund Act.
It is worth noting that employees earned an annual interest of 8.65% in F.Y 18–19 through investment in PF. However, premature withdrawals for specified purposes, including housing and marriage are subject to being taxed. And the balance in employee’s account is paid as a lump sum on retirement, or in case of a sudden crisis like permanent disablement or death.
Investment in Unit Linked Insurance Plan (ULIP)
ULIP is an insurance plan u/s 80C with the option to invest in equity markets. Hence it is recommended that only individuals with a definite investment objective, high-risk tolerance, and thorough knowledge should invest in ULIP.
Lock-in period in ULIP is 5 years which is relatively less. Historically, ULIPs have given a 9-12% return. But that may vary according to the incumbent market situation.
However, under ULIPs, the investor can switch funds between growth, equity, balanced and income funds based on the market situation and investment objectives. ULIPs allow 4 switches every year for free. This should be enough for a seasoned investor to find his groove.
Tax Saving Fixed Deposits
Tax Saving FDs u/s 80C are a classic example of a contingency investment. Tax Saving FDs serve two purposes as you might have guessed. They allow you to invest in a risk-free manner with guaranteed returns and are also tax-exempt. That’s like hitting two birds with a single stone!
Unlike your regular Fixed Deposits, Tax Saving Fixed Deposits have a lock-in period of 5 years. Clubbed with an approximate 7-9% return, it looks like a safe bet for people with low-risk appetite.
Tax Saving FDs are best suited for investors with a conservative investment style. Usually, senior citizens find this scheme to be more compelling as compared to other investment options.
Below is a table that compares the investment options when they are stacked against each other.
|Risk Rating||High||Low||Low||Low||Medium to High|
|Taxation||Tax-Free||Tax-Free||Taxable||Taxable||Maturity is Tax-free|
Apart from these investment options, investors can also choose to invest in NPS, NSC, SCSS and the Sukanya Samriddhi Yojna and claim a Tax Deduction. However, the importance of choosing the correct investment was never more paramount. The sluggish economic trends could provide an opportunity to invest in schemes at a bargain. Only to have them sold off at a premium. But that requires clarity in personal finance goals and correct assessment of the risk associated.