What are the Best Instruments Available for Savings
Although I stated earlier that savings is irrelevant due to rising inflation and decreasing rate of returns from various traditional savings instruments, it is important to note that initially, you would have to save a certain amount of money to invest and start generating an additional income. Taking this into consideration, it would be prudent to be aware of the various Savings instruments available to you and the pros and cons that each instrument would provide you.
1. Post Office Small Savings Schemes
Post Office Savings Schemes are secured since the establishment is under the purview of the Indian Government. It gives safety for your saved capital as well as nominal returns. Some of these schemes also come with Tax benefits such as tax deductions and returns tax free under certain conditions. All the schemes are not the same and the different instruments available serve different purposes. For Example, the Savings Accounts and Time Deposit Accounts, serve short term financial goals (such as saving up capital for investment into additional income sources), while on the other hand the National Savings Certificate (NSC) serve more long term purposes. It would be best to use the table for comparison to find the advantages provided by each instrument and how it would help to achieve your financial goals. Select according to your requirements. There is no one solution for every financial goal and you can also combine various instruments to invest into.
2. Tax Saving Fixed Deposits (FD’s):
These type of Fixed Deposits are used to do financial planning to reduce tax payments. These FD’s are having a lock-in period of 5 years and the Maximum amount of Tax Deduction per Financial Year is INR 1,50,000/- under Section 80(C) of the Income Tax Act. It is also important to note that while there is no maximum investment amount, the returns are all under taxable income. This has been a suitable investment option for those who are looking for guaranteed returns and low risk. However, taking into consideration the recent developments in the banking sector, it doesn’t seem to be a low risk option anymore. The financial sector is evolving each day. It is important that our financial approach evolves along with the changing scenario.
3. Unit Linked Investment Plans (ULIP):
A ULIP is a type of insurance plan which provides life insurance coverage as well as Investment under a single scheme. As with most insurance plans, the premium payment is eligible for tax deduction upto INR 1,50,000/- under Section 80 (C) of the Income Tax Act. The maturity amount (returns) of the ULIP are completely exempt from Income Tax under Section 10 (10 D). The minimum annual investment varies from fund to fund. The returns are not guaranteed since it is linked to the performance of the fund. It should be considered as a long term savings instrument since it is linked to Share Market performance.
4. Equity Linked Savings Scheme (ELSS):
The Equity Linked Savings Scheme is a type of Mutual fund Instrument with a lock in period of 3 years. Funds being saved in this scheme are eligible for tax deductions of upto INR1,50,000/- in a financial year under Section 80(C) of the Income Tax Act. The returns on ELSS funds will be taxed as Long Term Capital Gains at 10% and the dividends generated by the fund will also be liable to be taxed at 10% under the Dividend Distribution Tax. Although the returns are taxed as mentioned, it is important to note that since ELSS funds invest 80% of their assets into Equity (company shares), over the long term they provide a high compounding potential. However, this is a long term instrument and if you are a risk averse investor, it would be best to keep your holding in an ELSS to a minimum.
As you can see, there a huge range of options that can cater to your situation, whether small savings or substantial savings. These instruments, if selected suitably to your situation and financial goals, will help you achieve those goals. As a personal challenge, please take some time out of your schedule today and go through all these schemes to see which of these schemes would be best for you to save up a corpus of at least INR 1,00,000/ over the next 1 year.
I hope that this information has provided you value and that it helps you take a more active interest in your personal finances.
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Thanks for reading and I hope that you have a successful day!
Financial planning should be done in consultation with a registered Chartered Accountant (CA) or a Certified Financial Planner (CFP). The views in this blog are the author's personal views alone.