A little over a month is left to plan your tax-related investments under Section 80C for the financial year 2020-21. If you are a conservative investor and your idea of investing in tax-saving instruments is not to earn huge returns by taking high risk, here is a list of investment options under Section 80C that offer guaranteed returns. Most of these schemes are backed by the government.
5-year Tax Saving Bank FDBank fixed deposits are the most popular investment option for risk-averse investors. Tax-saving deposits by banks come with a lock-in of five years. At present, SBI 5-Year Tax Saving FD offers an interest rate of 5.40 per cent per annum. It's 6.20 per cent for senior citizens. The interest earned on these deposits is taxed according to the investor's tax bracket. The bank also deducts TDS wherever applicable. Senior citizens can claim a deduction of Rs 50,000 on the interest earned from deposits according to Section 80TTB. Tax saving FDs fall under ETE tax status, which means, investment and maturity value are eligible for tax exemption but interest on investment is taxable.
National Savings Certificate (NSC)Another post office savings scheme, NSCs are quite popular among the HNIs to diversify their fixed income portfolio. It offers guaranteed interest for a term of five years. Currently, NSC offers an interest of 6.8 per cent compounded annually, but payable at maturity. NSC interest is taxable when received, at the time of maturity. The interest earned on an annual basis is not paid to the investor but reinvested. It is interesting to note the interest amount which gets reinvested qualifies for a fresh deduction under Section 80C, thereby making it tax-free. It falls under ETE tax status.
Senior Citizen Savings Scheme (SCSS)A government-backed scheme for investors above 60 years of age, SCSS pays interest at the rate of 7.4 per cent per annum at present. An individual may invest a maximum of up to Rs 15 lakh in SCSS in lumpsum. It has a tenure of five years and the account can be extended for a further three years, within one year of maturity. The interest is paid quarterly, which makes it a source of regular income for investors. The interest earned on SCSS is taxable if it exceeds Rs 50,000 in a financial year. TDS is also deducted accordingly. It falls under ETE status for taxation purpose, which means investment and maturity value are eligible for tax exemption but interest on investment is taxable.
Sukanya Samriddhi Yojana (SSY)This is a government scheme for the betterment of a girl child. A parent or a guardian can open SSY account in the name of a girl child till she attains 10 years of age. It allows making deposits for up to 15 years from the date of opening the account. A SSY account matures after 21 years or at the time of the marriage of a girl child after she becomes 18. An investor is allowed to withdraw up to 50 per cent of the deposit once the girl reaches the age of 18 or after passing Class 10. The account can be opened for a maximum of two daughters, with a combined investment of up to Rs 1.5 lakh in a year. Like PPF, investments under SSY fall under EEE. EEE means an investor enjoys tax exemption at the time of deposit, accrual of interest and withdrawal. SSY accounts currently offer 7.6 per cent interest per annum, the highest among small-savings schemes.
Public Provident Fund (PPF)Fully secured with government guarantee, PPF is one of the safest fixed income investments as it does not bear any market risk. The drawback however is that it has a long maturity of 15 years. The maturity can be further extended by five years if you do not need the money at the time of maturity. PPF allows premature withdrawals after five years of opening the account under certain circumstances. Currently, PPF offers an interest rate of 7.1 per cent p.a, compounded yearly. The interest rate does not remain fix as the Government revises it every quarter. Only one account can be opened by a citizen. PPF falls under EEE tax status. EEE means an investor enjoys tax exemption at the time of deposit, accrual of interest and withdrawal.