Whenever I get a new client, I cringe to see the "5 Year Term Deposit" as one of the 80C deductions. This is one of the deductions which we don't recommend to our clients. There are other zero risk investment options that are much better than this.
I will explain why through an example ( I am ignoring Cess for my calculations to make it simple):
Consider a person who has an income of Rs.15 Lacs. Since he is now in 30% slab rate. We recommend maxing out the 80C deduction to save approx Rs.50,000 in tax. Now let's consider the various options available to us.
1) 5 Year Tax Saver Fixed Deposits:
Market Interest Rate - 6% p.a
Amount Invested - Rs 1.5 Lacs
Term - 5 Years.
Effective rate of Interest: 6%-1.8% = 4.2% ( Market Rate - Tax Rate).
Maturity value after 5 years - 1,84,260
Disadvantages: You cannot use this money for 5 years. You cannot pre-mature the FD or take any loan against this.
2) National Savings Certificate:
Market Interest Rate - 6.8 % p.a
Amount Invested - Rs 1.5 Lacs
Term - 5 Years.
Effective rate of Interest: 6.8%-2.04% = 4.76% ( Market Rate - Tax Rate).
Maturity value after 5 years - 1,89,265
An additional advantage is that the interest earned on NSC will be eligible for an 80C deduction in the next year. So you will need to invest a lesser amount.
Disadvantages: You cannot use this money for 5 years. You cannot pre-mature the amount invested or take any loan against this.
3) Public Provident Fund:
Market Interest Rate - 7.1 % p.a
Amount Invested - Rs 1.5 Lacs
Term - 15 Years.
Effective rate of Interest: 7.1% p.a ( Interest is tax free).
Maturity value after 5 years - 2,11,368.
Disadvantage: The money is locked in for 15 years. However, you can get pre-mature up to 50% at the end of 5 years.
4) Employee Provident Fund:
Market Interest Rate - 8.5 % p.a
Amount Invested - Rs 1.5 Lacs
Term - Up to retirement
Effective rate of Interest: 8.5 % p.a ( Interest is tax free).
Maturity value after 5 years - 2,25,549.
Note: Even though the investment is till retirement, you can do partial or full withdrawal for various reasons. There are many rules for these and we will publish a separate article to cover these.
The above 4 are very low-risk options. We also have additional schemes like Sukanya Samriddhi Yojana and Senior citizen savings scheme. However, everyone is not eligible for these schemes. So we have not included them here.
If you have financial stability, we would recommend going for the PPF or EPF. Even though they have a long maturity period, they allow withdrawals in case of Medical Emergency and loans if there is no emergency ( eg: Marriage, Buying a house, Unemployment). If you are an employee, Go for EPF and not PPF. Use PPF only if you have maxed out the EPF contribution. ( Note: Employee can contribute higher than the employer. So you can ask your employer to deduct a higher amount every month).
If you don't want to invest the money in long haul under EPF/PPF, then better go for National Savings Certificate.
Choose wisely! After all, its your hard earned money.