Where To Invest In Short Term For Big Tax Benefits?

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It’s famously said that two things you can’t escape in life are death and taxes. Well, one thing that you can do is lower your taxes – within legal premises. And a great way to go about it is to make short-term investments aimed at reducing taxable income.

In this article, we shall understand how exactly short-term investment helps save on taxes, and which ones are the most popular avenues for tax benefits in India.

What is a short-term investment?

Short-term investments are financial instruments that offer returns within a short period, typically less than three years. These investments are designed to provide liquidity, preserve capital, and generate quick returns.

They are ideal for individuals looking to park their funds for a brief period while seeking tax benefits.

10 short term investments for tax savings

1. Fixed Deposits (FDs)

Bank FDs with a tenure of 5 years are eligible for tax deduction under Section 80C.
Interest earned is taxable, but the principal amount invested qualifies for tax deduction.

2. Public Provident Fund (PPF)

Although PPF has a 15-year maturity, partial withdrawals are allowed after the 5th year.
Contributions up to INR 1.5 lakh annually qualify for tax deductions under Section 80C.

3. National Savings Certificate (NSC)

NSC has a maturity period of 5 years.
Investments up to INR 1.5 lakh are eligible for tax deduction under Section 80C.

4. Equity-Linked Savings Scheme (ELSS)

ELSS has a lock-in period of 3 years.
Investments up to INR 1.5 lakh per financial year are eligible for tax deduction under Section 80C.
Potential for higher returns due to equity exposure.

5. Tax-Saving Fixed Deposits

Similar to regular FDs but with a 5-year lock-in period.
Eligible for tax deduction under Section 80C.

6. Unit Linked Insurance Plans (ULIPs)

ULIPs combine investment and insurance with a minimum lock-in period of 5 years.
Premiums paid are eligible for tax deductions under Section 80C.

7. Sukanya Samriddhi Yojana (SSY)

SSY is a government-backed scheme for the girl child, with a tenure until she turns 21.
Deposits up to INR 1.5 lakh annually qualify for tax deductions under Section 80C.

8. Post Office Time Deposits

These have various tenures, with a 5-year deposit qualifying for tax deduction under Section 80C.
Safe investment with government backing.

9. Senior Citizen Savings Scheme (SCSS)

For individuals above 60 years of age.
The investment tenure is 5 years, extendable by 3 years.
Investments up to INR 1.5 lakh qualify for tax deductions under Section 80C.

10. National Pension System (NPS)

While primarily a long-term investment, partial withdrawals are allowed after 3 years.
Contributions up to INR 1.5 lakh under Section 80C and an additional INR 50,000 under Section 80CCD(1B) are eligible for tax deductions.

How to choose the right short-term investment?

The ideal short-term investment depends on your individual financial goals, risk tolerance, and investment horizon. Here are some factors to consider:

Risk Tolerance: How comfortable are you with potential fluctuations in returns? Some options like ELSS carry higher risk compared to fixed deposits.
Lock-in Period: Consider the time frame before you need access to your funds. Choose an investment with a lock-in period that aligns with your goals.
Returns: While tax benefits are important, consider the potential returns offered by different investment options.

Endnote

Investing in short-term options is a strategic way to save taxes and achieve financial growth. By understanding various short-term investments and their benefits, you can make informed decisions that align with your financial goals and risk tolerance. To get started with short-term investment, you can use a debit card like the 811 Debit Card by Kotak811 to keep a comprehensive track of your payments, gains, and special offers as well.

FAQs

1. How much tax can you save under Section 80C?

Under Section 80C, you can save up to INR 1.5 lakh annually by investing in eligible tax-saving instruments.

2. How much money can I keep in my savings account in India without tax?

Individuals depositing or withdrawing over ₹10 lakh in cash per year must inform tax authorities. This threshold is ₹50 lakh for current accounts.

3. Can I save 100% tax in India?

Your tax depends on your income and investment so, it’s not possible to give a blanket statement if 100% of tax can be saved. However, there are various deductions that can significantly reduce taxable income. We recommend consulting a qualified CA to make an informed tax planning.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.