08/01/2024 | 4 Comments

Today, when we are living in an extremely competitive world, one of the best ways to grow your wealth and make your money work for you is through investments. But you should also be aware of the fact that money that is invested wisely grows exponentially. There are several investment options where you can invest your money and help it grow and also, get the opportunity to save on taxes.

These are often short-term investment plans that can help you achieve this goal. So, in this article, we will be understanding the best tax-smart short-term investment plans you can consider.

National Saving Certificate (NSC)

The National Saving Certificate (NSC) is a popular choice for those seeking tax-smart investments. When you invest in NSC, you actually lend money to the government, and in return, you receive a certificate. The current interest rate for NSC is around 7.7% and hence, it provides you with a reasonable return on your investment. Also, NSC comes with a fixed maturity period, usually five or ten years.

One of the main advantages of NSC is that your NSC investments qualify for a tax deduction under Section 80C of the Income Tax Act. Moreover, for the first 4 years, the interest earned annually on your NSC investment must be reinvested and hence, will also be eligible for a tax break (within the overall annual limit of ₹1.5 lakh under Section 80C). However, the interest earned in the 5th year of investment will not be re-invested hence is taxable as per your applicable tax slab rate.

Equity Linked Saving Scheme (ELSS)

Equity Linked Saving Scheme (ELSS) is a mutual fund scheme that invests in equities or stocks. It combines the benefits of equity investments and provides you with the added advantage of tax saving. Investing in ELSS qualifies for a tax deduction under Section 80C and this is what makes it one of the best smart tax-saving options.

The lock-in period for ELSS is three years, which is relatively shorter compared to other tax-smart investments. But as ELSS invests in the stock market, the returns are also market-linked. So, while it has the potential to generate higher returns, it also means that the value of your investment can fluctuate based on market conditions.

Debt-Based Mutual Funds

A conservative investment option for you to begin with, debt-based mutual funds invest in fixed-income securities like government bonds, corporate bonds, and other debt instruments.

Though debt funds do not offer a separate tax deduction, the interest income from debt funds is taxed at a lower rate compared to interest income from traditional fixed deposits. And this can result in tax savings for people who fall under higher tax brackets. Moreover, debt funds are known for providing more stable returns compared to equity investments.

Fixed Maturity Plans

You can also consider Fixed Maturity Plans (FMPs) if you are looking for a great short-term tax planning and saving option. These plans are actually close-ended debt funds with a fixed maturity date.

Investing in FMPs can provide tax advantages similar to debt funds and hence, the returns here are treated as capital gains. But the best part is – FMPs have fixed tenure, and this perfectly aligns with the goals of investors looking for short-term options. The lock-in period of fixed maturity plans ranges from one to five years.

United Linked Investment Plan

United Linked Investment Plan (ULIP) is another tax-smart investment option wherein you can have good returns and at the same time save taxes. ULIP combines insurance and investment wherein a portion of your premium goes towards providing life coverage, and the rest is invested in market-linked funds.

Like other smart tax-saving options in the list, it also offers tax benefits under Section 80C for the premium paid, and this is what makes ULIPs an attractive tax-saving investment. Also, ULIPs provide flexibility in choosing between equity and debt funds based on how much risk you are willing to take.

Senior Citizen Saving Scheme (SCSS)

Saving schemes

Last but not the least, the Senior Citizen Saving Scheme (SCSS) is another option for you that makes for one of the most efficient investment strategies. The scheme is designed specifically for senior citizens, as the name suggests. Investments in SCSS also qualify for tax deductions and that’s why it is an attractive option for senior citizens looking to save on taxes.

However, you must also note that the interest income is taxable. SCSS has a fixed maturity period of five years, and the interest is paid out quarterly.