Have you completed your tax planning?

The end of financial year 2023-24 is almost here and it is time to ensure you have optimum tax planning in place. There’s a plethora of investment options to choose from to save on tax and earn handsome returns too. While choosing tax-saving instruments you should consider your risk appetite, investment goals and time horizon. Your portfolio of investments must be constructed keeping in mind safety of capital and maximising returns based on your risk appetite. The appetite for risk differs from person to person, and hence, portfolios too can differ for each individual. However if your risk appetite is low, the returns too will be low. Diversification across different asset classes can help balance risk and returns.

Here is a categorisation of investment options available to you under Section 80C of the Income Tax Act to save tax, based on the risk they carry. Low to moderate risk options ensure safety of capital and yield lower returns - in the range of six to 8.50 per cent. In today’s high inflation environment, these returns barely match the inflation erosion of returns. You should invest just about enough to ensure safety of your capital in these instruments and aim for higher returns with the rest of your investments.

Low to moderate risk

Here are some options that don’t carry high risk of capital erosion, but yield relatively lower returns.

Public Provident Fund (PPF): PPF is a government-backed savings scheme with a fixed interest rate and is considered a low-risk investment, currently yielding 7.10 per cent interest.

Employee Provident Fund (EPF): EPF contributions are considered safe as they are managed by the government and provide a fixed interest rate of 8.15 per cent.

National Savings Certificate (NSC): NSC is a low-risk investment option with a fixed interest rate of 7.70 per cent, compounded annually.

Five-year fixed deposit with bank: Tax-saving fixed deposits generally offer a fixed interest rate, making them a low-risk option.

Senior Citizens Savings Scheme (SCSS): This scheme is considered relatively safe and provides the highest interest payout of 8.20 per cent. However, investments in this scheme are capped at Rs 30 lakhs for each individual above 60 years of age.

Sukanya Samriddhi Yojana (SSY): SSY is considered a safe option with a fixed interest rate for a girl child. However, you have to keep in mind that the amount can be redeemed only when the child reaches 18 years of age.

Moderate to high risk

If you have a higher risk appetite, your tax-savings options should be from among the ones listed below. Returns from these instruments are not guaranteed and can be lumpy. If you can hold on to them for a longer term, the returns can be much higher than the inflation rate. It could be a means of wealth creation over the long term.

It is also important to note that returns from market-linked investments like equity-linked saving schemes and National Pension System are subject to market risks and can test your patience while yielding returns.

Equity-linked saving scheme (ELSS): ELSS funds invest in the equity market. While they have the potential for higher returns, they come with market-related risks.

National Pension System (NPS): NPS allows for equity exposure, making it subject to market risks. However, it also includes debt and government securities, reducing the overall risk. You can choose how much of equity exposure you want in your NPS. If you opt for lower equity, it becomes a safer choice, but yielding lower returns.

Life insurance: Life insurance itself is not an investment. While traditional insurance plans give very low returns and carry low risk, the unit-linked insurance plans (ULIPs) have market-related risks.

Saving options under other sections

In addition to Section 80C, which provides deductions for various investments and expenses, there are other sections under the Income Tax Act in India that offer tax-saving opportunities.