Are you one of those folks who pull all-nighters before exams, file tax returns on the last day and believe that deadlines are meant to be pushed? If so, you’ve probably left your section 80C investments to this week.
But we’re not here to lecture you about the risks of doing things at the last minute. Instead, we look at how you can make the most of your 80C choices, if you decide to invest now.
No commitments please
Right now, our e-mail and phone inboxes are being deluged by messages urging us to buy pension, endowment and child insurance plans to claim 80C benefits.
But writing out hasty premium cheques for such plans costs you more than you think. Once you sign up, you’ll be committing to hefty premium payments for many years without doing much homework. Nor do these products offer easy exit as early surrender can mean losing capital. Therefore, the most important rule to follow when making last-minute 80C choices is to stick to one-off investments and avoid committing to products that involve multi-year payments. Here are four possible one-off investments for your 80C.
Tax-saving bank deposits
Most scheduled banks run specially notified tax-saving fixed deposit schemes that qualify for 8OC benefits. They usually require a minimum investment of ₹10,000 with a mandatory five-year lock-in period. Unlike plain FDs, these deposits don’t offer a loan facility or early withdrawal options. While your initial investments qualify for 80C benefits, the interest you earn is taxable and subject to TDS.
Traditionally, tax-saving FDs have been poor investment choices because banks offer far lower rates on these five-year deposits than on their two to three-year FDs. But this year is an exception. With deposit flows slowing, and a new set of private sector and small finance banks competing with public sector banks for your deposit money, rates on some tax-saver deposits are quite attractive.
To get the best rates, though, you need to look beyond established banks, to new private sector or small finance banks. For instance, Suryoday and Deutsche Bank are now offering 8.25% per annum on their tax-saving deposits, IDFC First Bank is offering 7.75%. Some banks offer 0.50% extra if you are a senior citizen. These scheduled banks are RBI-regulated and your deposits are protected by deposit insurance.
Senior Citizens Scheme
If you are a retiree looking for last-minute 80C options, the Senior Citizens Savings Scheme (SCSS) from the small savings fold is a great bet this year. SCSS is open to all retirees who are at least 60 and you can invest any sum upto ₹15 lakh, though only ₹1.5 lakh per financial year is eligible for 80C benefits. The initial deposit of five years is extendible by another three years.
Equity linked schemes
All mutual fund companies offer equity linked savings schemes (ELSS) in which your initial investments qualify for 80C benefits. ELSS allow investments as small as ₹500 with no limits on the maximum investment. They carry a three-year lock-in period. As they are open-ended, you can invest on any working day and get units allotted at the day’s NAV.
ELSS do not offer fixed returns and your money is channelled into the stock market.
Your final returns will, therefore, depend on your entry point and the market movement during your holding period.
There is a risk of capital loss if you invest a lump sum at a market high and the market ends up lower at the time of redemption. On this count, this is not an ideal time to invest in these funds. ELSS schemes have delivered big gains in the last five years and stock market valuations are now quite expensive.
Nevertheless, if you are a young investor who can hold your ELSS for the next 7-10 years, you will be able to earn reasonable returns by riding out any dips in the NAV over the next 1-3 years. Choose ELSS funds with the best 10-year track record and avoid outperformers of the last 1 or 3 years.
MF retirement plans
For investors wary of equity risks, mutual funds (MFs) also offer less risky products that qualify for 80C exemptions that are not so well-known — retirement savings funds. They channel your investment into different combinations of bonds and stocks to help you accumulate a retirement kitty. Your money is locked in for five years or until retirement age, whichever is earlier.
Leading fund houses including HDFC, Reliance, Aditya Birla Sun Life, Franklin Templeton and UTI have retirement funds on their menu. They offer plans with varying equity-debt combinations: 90-10 (90% in equity, 10% in debt), 65:35, 40:60, 15:85 and even 10:90.
The big advantage of these funds over ELSS is that their bond component cushions your returns from stock market losses, even in the short run. They also periodically rebalance their portfolios to stick to the fixed equity proportion, thus selling stocks when they are expensive and buying them when they are cheap.
Your choice of retirement plan should depend on your age and risk appetite. If you wish to minimise risk, especially in the current market context, opt for plans with more than 50% debt component. Don’t confuse retirement schemes from mutual funds with those from insurance companies which carry annual premium commitments and longer lock-ins.