The best time to start planning your tax-saving instruments is at the beginning of a financial year. If you have missed the boat, the next best time is NOW. Yes, with just a few days left for the end of the financial year, you can still make the right investments now to save big on your taxes. 

With the Covid-19 scare, tax filing is the last thing on everyone’s mind. To give tax-payers some much-needed respite, Ms Nirmala Sitharaman, the Honourable Finance Minister of India on Tuesday announced the extension of the last date for filing returns to 30th June 2020. While the period for filing your taxes is a few months away, there is less than a week left for the end of the fiscal year FY19 – 20. You need to act fast and select efficient investment instruments that help you qualify for tax deductions.  

To help you avoid making poorly-thought last-minute investment decisions, we have listed the best tax-saving instruments for this year. Besides the tax-saving component, make sure to choose a product that aligns with your financial goals. 

1.ELSS (Equity Linked Savings Schemes) 

Average returns – 13.18% (for the last three years) 

Tax Benefits – Gains up to Rs. 1 lakh earned from ELSS are eligible for tax-deductions. 

Ask any financial expert, they rank ELSS as the No.1 tax-saving instrument for this year. These funds have generated the highest returns compared to all other tax-saving tools. Another benefit is that they have short lock-in periods of just three years.

What to expect this year? – ELSS funds are likely to offer only reduced returns for this year, due to the slow economic growth. Most financial experts agree that the best way to invest in ELSS is via regular SIPs. However, that’s not possible for year-end tax-savers. You need to invest in bulk to enjoy tax benefits. Make sure to check the portfolio, historical performance of an ELSS fund, before you invest in one. 

2.NPS (National Pension Scheme) 

Average returns – 9.33% (for the last five years) 

Tax Benefits – 60% of the corpus withdrawn at the time of retirement is entirely tax-free. The rest 40% is compulsorily invested in an annuity that helps you earn a monthly pension. However, the pension amount received is added to your taxable income post-retirement. 

NPS offers tax savings in three ways:

  1. Contributions to the scheme up to Rs. 1.5 lakhs are tax-deductible under Section 80C of the ITA. 

  2. Additional deduction up to Rs. 50,000 under Section 80CCD (1b). 

  3. Employer contributions up to 10% of the basic pay are tax-deductible under Section 80CCD (2).

NPS offers the benefits of both worlds. The returns generated from equities and the stability of bonds, offering long-term wealth creation for investors. Since NPS investors have a bigger exposure to equities, it's most rewarding in the long-term.

What to expect this year? – It’s highly unlikely that NPS will generate such good returns in the next few years. However, investors can expect to earn higher returns compared to other popular investment products like FDs and PPF. 

One major drawback of NPS is the very long lock-in period of your funds – till the time the investor turns 60. It can either be good or bad, depending on your financial goals. If you’re saving for long-term goals like retirement, a child’s marriage or higher education, then NPS is an excellent option. However, if you require funds within the short-term, then NPS may not be the right choice for you. 

3.ULIPS (Unit Linked Insurance Policies) 

Average returns – 8.09% (for the last three years)

Tax Benefits – Premiums on ULIPs that offer insurance cover up to 10x the annual premium are tax-free under Section 10D of the ITA. 

The newly launched category of ULIPs are low cost and offer returns comparable to mutual funds. ULIPs offer double benefits – insurance + investment. The major draw of ULIPs is that investors can switch their investments from debt to equity and vice versa, without any tax implications. 

4.PPF (Public Provident Fund)

Average returns – 7.9% per annum (fixed) 

Tax Benefits – The amount (up to Rs. 1.5 lakhs) invested in PPF is eligible for tax deduction under Section 80C of the ITA. Also, the amount received on maturity is tax-free. 

Traditionally, the go-to tax-saving instrument, PPF returns have dipped the last few years. Yet, it’s still one of the better options, due to the tax components. PPF scores over other equity-based tax-saving instruments due to their safety and liquidity. To keep your account active, all you have to do is invest just Rs. 500 per year. Partial withdrawals are also allowed after the fifth year. 

5.SCSS (Senior Citizens’ Saving Schemes) 

Average returns – 8.6% 

Tax Benefits – Interests earned up to Rs. 50,000 are tax-free. Investments up to Rs. 1.5 lakhs per annum are tax-deductible under Section 80C of the ITA. 

With a high-interest earning rate, SCSS is an excellent tax-saving instrument for senior citizens. Backed by the government, the SCSS is highly secure and offers easy liquidity. The interest is paid once every quarter and comes with a five-year lock-in period. Though your funds are locked in for five years, premature withdrawals are permitted with penalties.

Individuals above the age of sixty can invest in this scheme, and the overall maximum investment is Rs. 15 lakhs. 

6.NSC (National Savings Certificate) 

Average returns – Fixed at 8% per annum 

Tax Benefits – Investments up to Rs. 1.5 lakhs per annum are tax-deductible under Section 80C of the ITA. However, note that the interest earned on maturity is taxable. 

Falling interest rates of bank fixed deposits have renewed investor interest in National Savings Certificates. The maturity period of NSCs is either five or ten years. It can be opened at any post-office.

Just like PPF and FDs, NSCs offer guaranteed returns and the interest rates are fixed by the government once every quarter. However, note that, once you invest in the NSC, your interest rate is fixed and doesn’t change for the entire tenure. 

While NSCs do not offer high returns as other tax-saving instruments on this list like the PPF and NPS, it provides secured and stable returns, with capital protection.

7.SSY (Sukanya Samriddhi Yojana) 

Average returns – Fixed at 8.1% per annum. Subject to review periodically.  

Tax Benefits – Investments up to Rs. 1.5 lakhs per annum are tax-deductible under Section 80C of the ITA. Also, note that the interest earned and maturity amount are tax-free. 

It’s one of the best tax-saving instruments for parents of girl children below the age of ten years. The main objective of this scheme is to help parents save for the education and marriage expenses of their girl child. A parent can open this account at any post-office with a minimum investment of Rs. 1000 and for two girl children. It's a long-term scheme, and your funds can be withdrawn only after 15 years.

8.Tax-Saving FDs 

Average returns – Range from 6.5% to 7.6% depending on the bank. 

Tax Benefits – An investor can claim tax deductions up to Rs. 1.5 lakhs invested in tax-saving FDs under Section 80C of the ITA. Returns generated from tax-saving FDs are fully taxable. 

Earlier, tax-saving fixed deposits were one of the most popular last-minute tax-saving instruments for investors. However, with declining FD interest rates, it has fallen out of favour among savvy investors. 

Which is the Best Tax-Saving Instrument for FY 19 – 20? 

Like with all other investment queries, there is no one single answer that suits all. If you have left your tax-planning to the last minute and would like to invest to be eligible for tax deductions, you can choose any of the schemes listed above. Specific tax-saving instruments like the tax-saving FD can be opened immediately with just a few taps on your mobile banking app.

However, remember that tax planning is not a last-minute process. Ideally, you should commence it at the start of a fiscal year, so that you have the luxury of time to analyse the different options available and choose the best scheme that aligns with your short-term and long-term financial goals.

If you have missed it, you can always rely on any one of these eight schemes to save taxes, even at the last minute.