MUMBAI: When you are planning your finances for the year, tax-saving investments often take centre stage. You want to reduce your tax burden, but at the same time, you don’t want to lock away your money for too long. Many tax-saving options under Section 80C require a long commitment, making them less appealing if you prefer flexibility. However, there are some options that come with the shortest lock-in periods. In this blog, allow us to guide you through them and show you how they can fit into your financial strategy.
Why is the lock-in period important when it comes to investments?
Lock-in periods determine how long your money stays invested before you can withdraw it. They play a crucial role in balancing liquidity with long-term financial goals.
• Liquidity vs. Returns – Shorter lock-ins give you quicker access to your money, but they might come with lower returns. Longer lock-ins, on the other hand, often provide better compounding benefits and higher yields.
• Tax Benefits – Many tax-saving investments require a minimum holding period to qualify for deductions under Section 80C. Exiting too early could mean losing tax benefits and facing penalties.
• Discipline in Investing – Lock-in periods prevent impulsive withdrawals, ensuring that your money stays invested for a set duration. This helps build financial discipline and encourages long-term wealth creation.
• Market Volatility Protection – Short-term market fluctuations can impact investment returns, but a lock-in period helps ride out market ups and downs. This is especially useful for equity-linked investments where volatility is common.
• Goal-Based Planning – Choosing an investment with the right lock-in period helps align it with specific financial goals, such as buying a house or funding a child’s education. It ensures that funds are available when you need them most.
ELSS
ELSS is a tax-saving mutual fund that primarily invests in equities, offering the potential for higher returns compared to traditional fixed-income instruments. It comes with a mandatory lock-in period of 3 years, making it one of the most flexible 80C investment options in terms of liquidity. Since ELSS is linked to the stock market, returns are market-dependent and not fixed.
How to Invest
Investors can invest in ELSS through lump sum payments or a Systematic Investment Plan (SIP) via mutual fund houses, banks or online investment platforms. Since ELSS funds are managed by professional fund managers, it’s important to compare different schemes based on past performance, fund management style and expense ratios before investing.
Interest (Returns)
Returns on ELSS are not fixed, as they depend on market performance. Historically, ELSS funds have offered returns in the range of 12% to 15% per annum, though actual returns may vary based on stock market trends.
NSC
NSC is a government-backed fixed-income investment that offers assured returns while providing tax benefits under Section 80C. It comes with a 5-year lock-in period, making it a relatively mid-term option for investors seeking security and stable returns. The interest earned is compounded annually but paid out only at maturity.
How to Invest
NSC can be purchased from designated post offices across India. Investors can buy NSC certificates in their name, jointly with another person or on behalf of a minor. While there is no upper limit on the investment amount, only up to ₹1.5 lakhs per financial year qualifies for Section 80C deduction.
Interest
The interest rate on NSC is 7.7% per annum, compounded annually but payable at maturity. The interest accrued in the first four years is also eligible for tax deduction under 80C.
Final Thoughts
So, here’s how to calculate income tax while making the most of Section 80C deductions. First, list all eligible investments, such as ELSS, NSC, tax-saving FDs and life insurance premiums and check their respective lock-in periods. Then, total your contributions to see if they reach the ₹1.5 lakhs deduction limit under Section 80C.
If not, you can explore more options based on your liquidity needs and risk appetite. ELSS has the shortest lock-in of 3 years with market-linked returns, while NSC offers guaranteed returns over a 5-year term. Carefully select your tax-saving investments to maximise deductions while ensuring your money works efficiently for you.
