8 Best Short-term Investments with Tax Benefits

Many of us prefer to stay invested for the long term, but there are some investors who seek to invest for a shorter tenure, which may be for a few months or a year. Such investors park their surplus funds for some time until they need it to manage their financial commitments. And it would be an added advantage if short-term investments enable them to save taxes.

There are many such investment options available in India. If you're looking for the best short-term investments that offer tax benefits, some of them are listed below:

1. Equity-Linked Savings Scheme (ELSS)

Equity-Linked Savings Scheme is the only type of mutual fund scheme/investment eligible for tax deductions under Section 80C of the Income Tax (IT) Act. Investments of up to INR 1.5 lakhs in a financial year in an ELSS can be deduced from the taxable income. However, these schemes come with a lock-in of 3 years.

2. Debt-Based Mutual Funds

One of the best investment options in India for the short term is debt-based mutual funds. The tenure of debt funds is divided into 3 categories – Liquid Funds (up to 91 days), Ultra-Short Liquid Funds (3-6 months), and Low Duration Funds (6-12 months). Short-Term Capital Gains (STCG) tax is applicable on short-term gains earned from debt instruments if it is held for a tenure of 3 years.

But if you are investing in a debt fund scheme for the long term, then you can take advantage of the indexation. In simplest terms, indexation helps to reduce the tax liability on returns by adjusting the purchase price of an underlying asset considering the rate of inflation. Indexation benefit is only applicable on long-term capital gains from debt funds.

3. Unit Linked Insurance Plan (ULIP)

ULIP is a combination of life insurance and investment. The premium you pay for the policy is divided into insurance premiums and investments in your chosen scheme. The premiums are eligible for tax deduction under Section 80C of the IT Act.

You can claim a tax deduction of up to INR 1.5 lakh in a year. After the lock-in period of 5 years, withdrawals from ULIP are tax-exempted.

4. National Savings Certificate (NSC)

The government sponsored NSC is one of the leading short-term investment options in India. It is a fixed-income investment that offers guaranteed interest and complete capital protection. You can deposit a minimum of INR 1,000. NSC has a lock-in period of 5 years.

Under Section 80C of the IT Act, the investments you do for NSC are eligible for a tax deduction of up to INR 1.5 lakhs in a financial year.

5. Senior Citizen Saving Scheme (SCSS)

SCSS is also a government-backed investment scheme exclusively designed to offer retirement benefits to seniors above 60 years. SCSS allows a single deposit from INR 1,000 to INR 15 lakhs and has a maturity period of 5 years. Throughout the tenure, the investment generates interest income as fixed by the government.

Under Section 80C of the IT Act, investments of up to INR 1.5 lakhs in SCSS in a financial year are eligible for tax deductions.

Read More: Tax saving Options under than 80c

6. Tax-Saving Fixed Deposits

A Tax-Saving Fixed Deposit (FD) can also be an excellent choice if you're searching for short-term investment plans with higher returns. It is like a Regular FD but has a lock-in period of 5 years.

Investments of up to INR 1.5 lakhs in a Tax-Saving FD are eligible for tax deduction under Section 80C of the IT Act.

7. Fixed Maturity Plans (FMPs)

FMPs are close-ended debt mutual funds. The short-term investment scheme comes with a maturity ranging from a month to up to 3 years. Like other debt funds, STCG from FMPs is added to the investor's taxable income and is taxed as per their tax slab. However, LTCG comes with an indexation benefit and is taxed at 20%.

As can be seen, several short-term investment options come with tax benefits. If you're confused with the selection, here are some tips that could help you make an informed decision-

• Select an investment that aligns with your financial goals
• Understand your risk appetite and then choose an investment option
• As the investments come with a fixed lock-in, focus on your short-term financial needs before investing
• Consult with an investment advisor if you're unable to decide

• To choose the best short-term investment in India, you need to assess your financial needs, objectives, and risk appetite.
• You also need to select a trusted bank/financial institution to invest in these instruments conveniently.
• Whether you choose to invest in the short or long term, AU Small Finance Bank offers investment options such as AU 5-Year Tax Saving Fixed Deposits, Mutual Funds, National Pension System (NPS), and others.
• It is easy to start investing on the go with AU 0101 App by AU Small Finance Bank.