ULIPs and endowment insurance plans are very popular alternatives for tax saving but they are not very useful. They are low on performance and utility, but high on expenses. Instead, one should buy term insurance which is also eligible for tax exemption under Section 80C.
Fixed income avenues like National Savings certificate (NSC) and Public Provident Fund (PPF) provide guaranteed returns but given the long-term nature of these investments, you make a big compromise on returns. Extremely conservative investors can go for them. For others, they are avoidable.
The next option is the Equity Linked Savings Schemes or ELSS as they are popularly known. They are a growth oriented option which invest your money in equity markets to fetch inflation-beating returns in the long run. They have a three year lock-in. This is the most suitable tax saving alternative but the problem is that people tend to withdraw their money after the lock-in period. Avoid doing that. If you keep investing in ELSS year after year and hold it till retirement, it will translate into a sizeable retirement corpus.
Lastly, you have the option of National Pension System (NPS). It is also a suitable alternative to earn inflation beating returns in the long run, just like ELSS. But it doesn't let you take your money out till retirement. Even after that, you have to compulsorily buy an annuity using at least 40% of the accumulation. It is useful for someone who is extremely indisciplined with investing. The lack of liquidity enforces the discipline on the investor and ensures he is able to build a sizeable corpus by the time of retirement.
But someone who is disciplined enough can go for ELSS to exhaust the exemption available under Section 80C, and invest in NPS only to the extent of Rs 50,000 in a year to avail additional deduction under Section 80CCD(1B).
The ideal way to make your tax-saving investment is to do it every month. It also fits with your income and expenditure cycle. You earn every month, you spend every month and you invest every month. Further, it helps you average the purchase cost of your investment in equity and reduces the possibility of catching a market high.
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