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How To Save Tax With Short-Term Investments



Every year, you’ll receive alerts from tax specialists and your employer, indicating that tax season has officially begun. The moment has come for you to gather information about all of the long- and short-term investing plans in which you have invested your money. Before we look at the top short-term investment plans currently available on the market, let’s have a look at what short-term investment plans are in general.

What Are Short-Term Investment Plans, And How Do They Work?

Limited-term investment plans are liquid investments where investors can store their assets and earn a return. Short-term investments can produce significant returns over time while also providing tax benefits. Let’s look at the best short-term investment strategies that offer tax benefits. Examine the several short-term investment options.

The finest short-term tax-advantaged investment programs

Some of the finest short-term investments offer both high returns and tax advantages:

  1. Equity Linked Saving Scheme (ELSS)
  2. Debt-Based Mutual Funds
  3. Rajiv Gandhi Equity Savings Scheme (RGESS)
  4. Unit Linked Investment Plan (ULIP)
  5. Senior Citizen Saving Scheme (SCSS)
  6. National Saving Certificate (NSC)
  7. Tax Saver Fixed Deposits
  8. Fixed Maturity Plans

Check out the following list of the finest tax-saving short-term investments for further information:

Equity-Linked Savings Plan (ELSS)

ELSS are tax-advantaged mutual fund investment programs with varied portfolios. They’re also called tax-favoured funds. Because ELSS invest primarily in stocks, they are among the best short-term investing options. Its three-year lock-in period is the shortest of any tax-saving investment scheme. These short-term investing plans offer both tax advantages and capital gains. The lack of a good entry or exit load attracts investors to these short-term investment programs. These short-term investing schemes also create tax-free capital gains.

Debt Based Mutual Funds

Debt-based mutual funds invest in fixed-income securities such as corporate bonds and government securities. People invest in these short-term assets to earn fixed interest and capital gains. Debt funds pay interest at a rate promised or predetermined by the fund’s issuers.

Debt fund returns are usually within the issuers’ expectations, making them a safe short-term investment choice. Tax-advantaged investing does not apply to debt fund capital gains, which are taxable based on the holding term.

Rajiv Gandhi Equity Savings Scheme (RGESS)

RGESS, one of India’s best-performing short-term investment plans, was launched with the goal of encouraging micro investors who have little or no experience to invest in Indian capital markets. The income limit for this scheme was first set at Rs. 10 lakh in 2012-2013; however, it was raised to Rs. 12 lakh in 2013-14. The tax benefits under Section 80CCG are another aspect that distinguishes this scheme from other short-term investments. When you invest in these tax-saving short-term investments, you are eligible for a 50% deduction from your income, up to a maximum of Rs. 50,000 every fiscal year.

Unit Linked Investment Plan (ULIP)

ULIPs are one-of-a-kind short-term investment plans that provide both life insurance and investing rewards. They also offer a versatile strategy for balancing your assets between equity and loan components based on market conditions. However, the tax advantages of these short-term investment schemes are subject to certain limitations. ULIPs, as a tax-saving investment plan, provide benefits under Section 80C [3] if the premium is paid for at least two years. If you stop paying the premiums for these short-term investment plans, you will lose the tax benefits.

Senior Citizen Saving Scheme (SCSS)

SCSS, as the name implies, is intended for senior citizens in India. It is an appropriate short-term investment plan for persons over the age of 60 who want to make money. They can participate in this tax-advantaged investing plan through banks and post offices.

They can also claim a tax deduction of up to Rs. 1,50,000 under Section 80C for these short-term investment plans. SCSS has a five-year maturity period, making it one of the best short-term investment plans for the elderly.

National Saving Certificate (NSC)

The National Savings Certificate (NSC) is a government-backed tax-saving short-term investment program. It’s a tax-free savings bond aimed at low- to middle-income investors. You can always open an individual or joint account with another adult at your local post office.

The NSC has two fixed maturities: five and 10. It is a short-term investment if you invest for five years. You may be entitled to a tax deduction of up to Rs. 1,50,000 for investing in this plan. These short-term investment plans now pay an annual interest rate of 8%.

Tax Saver Fixed Deposits

Tax Saver Fixed Deposits are a tax-saving investment plan that provides tax advantages under Section 80C of the Income Tax Act. As an investor, you can obtain a maximum deduction of Rs. 1,50,000 by investing in these short-term investment plans with a five-year lock-in period.

You should be aware, however, that the interest you earn on these short-term investments is taxed. Short-term investment plans, as compared to savings accounts, have the potential to provide better returns.

Fixed Maturity Plans(FMPs)

FMPs are closed-ended debt funds that have a fixed maturity period, hence the name. They are among the short-term investment programs, with terms ranging from 30 days to 5 years. They are not the same as fixed deposits in terms of tax savings. When you participate in these short-term investment plans for more than a year, you can take advantage of indexation to reduce your tax burden in relation to inflation rates. FMPs, in addition to being one of the short-term investment plans, also serve as an asset allocation tool for investors.

How Do You Choose the Best Short-Term Investments?

When deciding to engage in one or more short-term investment plans, there are numerous factors to consider. A tax-saving investment strategy that works well for your peers may not work well for you. As a result, when choosing short-term investment strategies, you must consider a number of factors, including:

  • Your investing objectives
  • The maximum amount you can invest in short-term investment programs.
  • Your risk tolerance
  • Your financial requirements

You have the option of investing in secure, tax-saving investment plans or riskier long-term plans. Before making any final selections, be sure you understand the risk-return trade-off for various short-term investing plans.

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