Best Long Term Tax Saving Investment Options in India

Long term investment options are the financial pillars to cater to your long term goals. Investments with tenure more than three years are categorised as Long Term Investment Options.

There are a variety of Investment options offered by different financial institutions in India to cover the entire spectrum. You can choose as per your investment capacity, prior commitments and risk appetite.

Listing out priorities should be the starting point. Before delving into the jargons and technicality of the individual investment options, it is important to have a comprehensive understanding of what you are getting into.

Why Invest?

In simple words, savings refer to the corpus we keep isolated from all risk of depletion while investments are circumvented by certain risks and yield a higher return.

While Savings account offers meagre interest, investments have lucrative returns. Tax exemption on savings interest is capped at 10,000/- whereas your investments can provide better tax relief. That’s a double bonanza!

Points to note before opting for any Investment Option: The Three Mantra

Choosing an investment plan is a threefold task.

  1. Relevant Plan– Map the returns offered by the plan to your future projections and ensure they coincide.
  2. Capital to be invested– Invest only the surplus setting aside your immediate cash requirements and the rainy day funds. Plans with best returns usually have 5 to 10 years mandatory lock-in period.
  3. Tax Benefits– It is wiser to opt for investment options that render tax benefits on principal put in and applicable interest.

Best Long Term Tax Saving Investment Options available in the Market

If you have been safekeeping, your hard-earned savings in conventional savings account the below investment plans can give your money the growth sprout it needs.

You can view Long term investment options in blocks of investment period and their prospective returns. Ideally, invest in relevant plans which on maturity will help you realise your targeted aspiration.

We can make this process less tedious by making our goals the object of the exercise.

Investment Options with 3-10 years Tenure

These plans are to meet your discretionary expenses such as buying a car, financing a foreign trip or accumulating a corpus for a home loan down payment upon maturity.

Mutual Fund

Gaining prominence over the past few years, mutual funds equips you to invest in stocks, debt securities, money market securities, to name a few. The companies that supervise these funds are known as Asset Management Companies (AMC) regulated by the Securities and Exchange Board of India (SEBI).

Different mutual fund types have different risk tolerance.

  • Debt Mutual Funds– Invest in Debt Instruments or Fixed Income Securities only and categorised as low risk.
  • Equity Mutual Funds-Invest in Equity/Stocks and categorised as high risk and linked with higher gains over a long period.
  • Hybrid or Balanced Funds– Invest partly in Debt and Equities and categorised as medium risk.

Mutual funds help you achieve your financial target by both one-shot investment and instalments (SIP) as per your choice. SIPs are advisable as it eases the financial drain.

Most effective and popular is ELSS (Equity Linked Savings Scheme), which has the lowest lock-in period. It is deemed to be a popular tax saving investment option that favours benefit up to 1.5 Lakh under section 80C of the Income Tax Act. However, ELSS is linked to market risk, and your corpus will be prone to market fluctuations.

Takeaways:

  • Lock-in period- 3 years for ELSS, no lock-in for others
  • ELSS comes with tax benefits up to 1.5 Lakh
  • Highly volatile and exposed to market fluctuations

Investment Options with 10-20 years Tenure

These investment options mainly focus on necessary overheads such as financing higher education and marriage expenditure for your children.

Public Provident Fund

Traditionally considered as the most tax-efficient tool, PPF promises fixed returns. It can be maintained through bank or post office and offers great tax benefits.

Amount on maturity is an extrapolation of interest rate offered with no surprise element.

Takeaways:

  • Lock-in the period- 15 years with partial withdrawal in 5th year subject to conditions
  • Triple tax benefits on principal invested, interest earned and amount on the maturity
  • Steady growth sheltered from market variation

Investment Options with 20+ years Tenure

These tools are crafted specifically to adhere to your retirement needs. It helps you to build the required corpus for sustaining a post-retirement lifestyle. The money you put into these investment options needs to stay put for a long period to guarantee the best returns.

National Pension Scheme

NPS is regulated by the government. One can contribute till 65 years of age and can start as early as 18 years. The withdrawal amount varies as per your pension account type.

  • Tier I Pension Account- Money cannot be withdrawn till retirement. Minimum annual contribution is 1000/-
  • Tier II Pension Account- No restrictions imposed on withdrawal. Minimum annual contribution is 250/-

Takeaways:

  • In NPS you have to buy an annuity with 40% of the corpus on maturity
  • Withdrawal restrictions for Tier I accounts
  • Unlike PPF it does not enjoy total tax exemption

Voluntary Provident Fund

In addition to the mandatory contribution of 12% of your Basic and Dearness Allowance you make toward your Employee Provident Fund, you can choose to increase the contribution up to 100%.

The additional contribution is also subject to risk-free 8.65% annual interest and tax relief, which assures good cumulative returns upon retirement. This makes VPF one of the most sought investment option.

Takeaways:

  • Tax benefit on principal contributed under Section 80 C of Income Tax Act
  • Flexibility of withdrawal for financial emergencies following certain terms and conditions
  • Amount withdrawn before 5 years will lose tax exemption benefits

The choice of a tax-saving investment option should be in alignment with your requirements and financial discipline. An overall understanding and knowledge of different investment plans will help you leverage the best tool as per your monetary restrictions.

However, always keep in mind, “Never put all your eggs in one basket”. Spread out your investments to reduce risk and ensure different maturity values to cater to your changing necessities.

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