5 Tax-saving Investments for Millennials to Save Taxes

Are you a millennial looking to save taxes? Do you want to put your money in a tax-efficient investment? You may consider investing in tax-saving investments with the potential to generate an inflation-beating return over the long-run. If you are a millennial in the early stages of your career, you could save a lot of money for critical financial goals. You may consider investing in tax-efficient investments that match your investment horizon and risk tolerance.

Let’s take a look at five tax-saving investments for millennials

Public Provident Fund

If you are a conservative investor, you could look at the PPF for steady return along with the tax benefit. PPF has a compulsory lock-in period of 15 years. It is an excellent investment to achieve your long-term financial goals, such as buying a house or retirement planning.

PPF offers you a tax deduction up to a maximum of Rs 1.5 lakh per year under Section 80C of the Income Tax Act, 1961. Moreover, the interest you earn on the PPF and the amount you withdraw at maturity are tax-free. 

Your investment in the PPF enjoys a guarantee by the government. It is one of the safest tax-saving investments. PPF currently offers you an interest rate of 7.1% for the October to December quarter. PPF offers one of the highest interest rates among fixed-income investments. Millennials may consider investing in the PPF for inflation-beating return along with tax-saving for the long-term. 

Tax-Saving Fixed Deposit

You may consider putting your money in the tax-saving fixed deposit at a public or private sector bank. You get a guaranteed return along with the benefit of tax saving. Your investment in the tax-saving fixed deposit receives a tax deduction up to Rs 1.5 lakh a year under Section 80C. However, you have a lock-in period of five years, where you cannot liquidate your investment. You must pay tax on the interest you earn from the tax-saving FD as per your income tax bracket. 

You may consider putting your money in the tax-saving FD if you are a conservative investor. It has a shorter lock-in period as compared to the public provident fund. However, it also offers you a lower return similar to a regular fixed deposit. 

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Equity-Linked Savings Scheme

If you are a millennial, you may consider putting your money in the equity-linked saving scheme or the ELSS. It is a tax-saving mutual fund with the bulk of the corpus in equity and equity-related instruments. Many millennials who are first-time investors in the stock market, prefer to invest in the ELSS as it offers tax benefits. You enjoy a tax deduction up to Rs 1.5 lakh per financial year under Section 80C, on your investment in the ELSS. 

ELSS may offer the twin-benefits of inflation-beating return along with tax-saving. Millennials who are in the preliminary stages of their career have several working years ahead of them. You could invest in the ELSS as it offers the power of compounding benefit over the long-run. It is reinvesting your earnings at the same rate of return to grow the principal investment over some time.

You could put your money in the ELSS through the systematic investment plan or the SIP. It is a method of staggering your investment in the equity-linked saving scheme over some time. You could start a SIP in the ELSS with just Rs 500 per instalment. 

ELSS has the shortest lock-in period among all the tax-saving investments under Section 80C. It has a lock-in period of only three years as compared to the tax-saving FD and the PPF.  ELSS is an excellent tax-saving investment if you fall into the higher income tax brackets. You may save as much as Rs 46,800 a year in taxes if you fall in the 30% income tax bracket. Younger millennials may not have major financial commitments and could invest in the ELSS to build wealth over the long-term. However, you may consider ELSS only if it matches your investment horizon and risk appetite. 

National Pension System

Millennials could invest in the National Pension System or NPS to build wealth and save taxes. It is a government-sponsored pension scheme where you make regular contributions to the account. If you are young and an aggressive investor, NPS may help you build a corpus for retirement. 

NPS invests your money in broad asset classes such as equity, corporate bonds, government securities, and alternate investment funds. However, NPS allows you to increase your allocation towards equity up to a maximum of 75%. You can’t withdraw the funds until your retirement or till you turn 60. It helps you to benefit from the power of compounding where you earn a return on your returns. 

You may open the Tier I and Tier II account under the National Pension System. However, Tier 1 is mandatory when you open the NPS account, and you cannot withdraw your money till your retirement. The Tier II account is voluntary, and you may withdraw the entire amount at any time. 

You may opt for the auto or active choice for the asset allocation of your NPS account. You could decide on how to invest your money in each asset class under the active choice. However, the asset allocation under the automatic choice depends on your age. 

You may claim a tax deduction up to a maximum of Rs 1.5 lakh per year under Section 80C. It is on your contribution towards the Tier I account of the NPS. You may also claim an additional tax deduction on the NPS Tier 1 account, up to Rs 50,000 per financial year under Section 80CCD(1B) of the Income Tax Act, 1961. Millennials may consider the investment as it offers a tax benefit along with an opportunity to invest in equity.

You may withdraw from your NPS Tier 1 account when you turn 60. However, you get a tax exemption only on 60% of the corpus in the account. You may have to mandatorily put the remaining 40% of the corpus in an annuity plan. You could get regular payouts across your lifetime from the annuity plan. However, you will have to pay tax on your annuity payouts depending on your income tax bracket. 

National Savings Certificate

You may invest in the National Savings Certificate or the NSC at any post office. It is an ideal investment for millennials as you may invest a minimum amount of just Rs 1,000 and in multiples of Rs 100 thereof. You may also put your money in the NSC without any upper limit. NSC has a lock-in period of five years. 

You may consider investing in NSC if you are a conservative investor. It is a safe investment and enjoys government backing. You could invest in the NSC to save tax and also grow your wealth. Your investment in the NSC enjoys a tax deduction up to a maximum of Rs 1.5 lakh a year under Section 80C of the Income Tax Act.

NSC currently offers an interest rate of 6.8% for the October to December quarter. You won’t get the interest from the NSC immediately as it accumulates in the account. The interest is deemed to be reinvested and is eligible for a fresh deduction under Section 80C. However, the interest you get from the NSC in the final year does not enjoy the tax deduction. You will get this interest along with the accumulated interest of the earlier years and the principal amount on maturity of the scheme. 

Millennials may consider tax-saving investments to grow wealth and save taxes. You may select suitable tax-saving schemes depending on your risk appetite. Millennials have time on their side and may consider investments that offer an inflation-beating return and save taxes over the long-run. It helps your money grow through the power of compounding as you earn a return on your returns. In a nutshell, you must choose tax-saving investments based on your risk tolerance, financial goals and investment horizon. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in