It is that time of the year when you rush to invest in tax saving instruments. Under Section 80 C, you are allowed deduction up to ₹1.5 lakh for certain investments made from your total income.
As a thumb rule, many of us compare returns before choosing an investment. But while returns matter, equally critical is liquidity, or the ease with which you can withdraw money from the instrument. Different tax saving instruments have different lock-in periods and withdrawal rules.
Here’s how you can trade off one (returns) for the other (liquidity) depending on your risk profile and time horizon.
Long-term, but risk averse
The Public Provident Fund (PPF) has been one of the most popular savings schemes, with its coveted EEE (exempt-exempt-exempt) status. The initial investment is eligible for tax deduction under Section 80C. The interest is also tax-free; so are withdrawals.
While the interest rate is in itself subject to change every year, it cannot be lower than long-term government bond rates.
Last year, the rates were fixed at 8.7 per cent. While the tax exemption at all the three stages pushes the yield up by more than the interest rate alone, the PPF does not score high on liquidity.
The investments are locked in for a period of 15 years and partial withdrawals are allowed only after the end of the sixth year. The amount that can be withdrawn is subject to limits based on the outstanding amount at the end of the fourth year. So, if you are risk averse and can part with your money for a fairly long period, the PPF is an ideal option.
