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Retirement planning and tax saving are two primary investment objectives of most investors. Investment options which offer tax benefits and an opportunity to create wealth are always a favorite of the investing community. The Government of India, under Section 80C of the Income Tax Act, provides a list of investments / expenditures which offer tax deductions to people. Here is the list:

 

1. Life insurance policy premium

2. Sum paid under a contract for a deferred annuity
3. Sum deducted from salary payable to Government servant for securing deferred annuity or making provision for his wife/children
4. Contributions made under Employees’ Provident Fund Scheme

5. Contribution to Public Provident Fund Account / any recognised provident fund

6. Contribution to an approved superannuation fund

7. Subscription to any notified security or notified deposit scheme of the Central Government like Sukanya Samriddhi Account Scheme.

8.  Subscription to National Savings Certificates (VIII Issue)
9.  Contribution for participation in unit-linked Insurance Plan of UTI
10. Contribution to notified unit-linked insurance plan of LIC Mutual Fund
11.  Subscription to notified deposit scheme or notified pension fund set up by National Housing Bank
12. Tuition fees (excluding development fees, donations, etc.) for full time education of any 2 of his/her children
13. Certain payments for purchase/construction of residential house property
14. Sum paid towards notified annuity plan of LIC
15.  Subscription to any units of any notified [u/s 10(23D)] Mutual Fund or the UTI (Equity Linked Saving Scheme, 2005)
16. Contribution to any pension fund set up by any mutual fund which is referred to in section 10(23D) or by the UTI (UTI Retirement Benefit Pension Fund)
17. Subscription to equity shares or debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions
18. Subscription to any units of any approved mutual fund referred to in section 10(23D)
19. Term deposits for a fixed period of not less than 5 years with a scheduled bank, and which is in accordance with a scheme 11 framed and notified.
20. Subscription to notified bonds issued by the NABARD.
21. Deposit in an account under the Senior Citizen Savings Scheme Rules, 2004
22. 5-year term deposit in an account under the Post Office Time Deposit Rules, 1981

With such a long list of options, choosing the right investment can be a daunting task, to say the least. ELSS funds have been the most preferred option in recent years for the following reasons:

Save tax and earn high returns

ELSS funds offer a tax deduction of up to ₹150,000 under Section 80C of the Income Tax Act. These funds offer the EEE benefit – tax exemption, wealth accumulation and zero exit load. Further, these funds invest primarily in the equity market in a diversified manner, which gives investors a good opportunity to earn inflation-beating returns.

Lowest lock-in period

Of all the investment options available under Section 80C, ELSS funds offer the lowest lock-in period of only 3 years.

Also, these funds do not have a maximum investment period like PPF (15 years) or FD (10 years) has. The capital gain on these investments will be counted as Long-term Capital Gains (LTCG), which is tax-free. Post the lock-in period, the investor can choose to liquidate the investment or stay invested, based on the fund performance.

Here is a quick glimpse at how ELSS compares with the other commonly used tax-saving investments:

 

Investment ELSS PPF FD NSC NPS
Approximate returns 12-14% 7-8% 6.5-7.5% 7-8% 7-8%
Lock-in period 3 years 15 years 5 years 5 years Till retirement
Tax on returns No No Yes Yes Yes (partially)

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