The most common and accepted form of investment is fixed deposits. The interest which they earn gets added into their income and thus they end up paying marginal rate of tax. For example a person, who is 30% tax slab, gets Rs. 1,00,000 interest income on his fix deposits at the interest rate of 9% then he has to pay 30.9% tax on the interest income and finally gets Rs. 69,100 in hand. It means you get just 6.2% return in hand after tax. So, there is the need to understand other investment options & their taxation.
An alternate to fixed deposits with minimum risk is Debt funds. They invest in Govt. & corporate interest papers. However while investing in these funds one needs to keep in mind the taxation. If one invests for less than 36 months then the taxation is just like the taxation on fixed deposits, but if one invests for more than 36 months then he will have to pay 20% tax after indexation. For example if a person earns 9% annualized return and inflation rate is 6% which means he/she earns 3% after inflation and will have to pay 20% on it which will be just 0.6%. So one will be able to get 8.4% return in hand after tax irrespective of your tax slab.
However in terms of returns the best advisable option to invest is the equities. One can buy stocks directly from the market or through equity mutual funds. Equity markets may be risky for short tenure, but in long run they provide highest returns in comparison to other asset class. SENSEX has provided the annualized return of 16.8% since inception. Also the taxation in equities is low. If one invests for less than 12 months then it will be consider as short term capital gain & he will have to pay 15.45% tax on capital gain. If one invests for more than 12 months then gain will be considered as long term capital gain and it will be totally exempted from tax.
Third option could be the balanced funds where at least 60% is invested in equities and rest in debt. It is safer then equities but riskier than debt. In long run balanced funds have provided annualized return of 14-15%. The taxation of balanced fund is same as in equities. So by investing in balanced fund you can save the tax even on the portion which has been invested in debt.
However investment in any of the above asset class will depend on risk profile of the customer and time horizon of the investment. A Financial advisor can assist you in understanding your risk profile and advise you right investments to achieve your financial goals.