“In this world, nothing can be said to be certain, except death and taxes.“- Benjamin Franklin.
If you are reading this, you are likely to be someone whose income exceeds the threshold of Rs 2.5 lakhs and falling in the tax paying brackets. There are some legitimate ways of saving taxes and the good thing is that most of them also help you grow your wealth. These options usually have aand vary in the nature and amount of return they provide. You must also remember that each of these alternatives also serves specific purposes and tax saving is not the purpose but an ancillary benefit of that.
Comparing the different options
Summary: The best way to look at the various 80Coptions is to see what is pre-determined and what is optional. EPF, Home Loan repayment, and Tuition Fees are pre-determined. Add them up and see how much of your 1.5 lakh limit is utilized. Use the below table to decide where you want to the rest.
Based on your risk appetite and expected returns, you can choose a product that’s best suited for your situation.
What does Scripbox recommend?
- ELSS Mutual Funds – For people who want superior returns and also have higher risk appetite
- PPF – For people who want returns at par with inflation and have very low-risk appetite
For a more detailed understanding of the most popular tax savingoptions, please read our detailed review below.
ELSS Tax Saving Mutual Funds
or Equity Linked Saving Schemes, are a kind of equity-linked . As they in equity or , have the ability to deliver superior returns – 14-16% over the long term. That’s a full 6-8% above inflation. This return is not guaranteed though but historical evidence suggests that these returns are achievable over the long term.
have a of only 3 years – the lowest amongst the options available.
You canup to Rs 150,000 in either as a lump sum or on a monthly basis ( ) thereby spreading your over the course of the year. The latter also helps in reducing the volatility that’s typical of equity-linked products.
You canin these through an advisor or an online portal like Scripbox.
Public Provident Fund
is a good option if you are looking for an option with certain returns.
Yourearn interest at a rate announced every year – currently 8.7%. return is therefore mostly at par with inflation. However, it is tax-free and you can do a lump sum or small regular .
The duration of aaccount is 15 years which is extendable by 5 years at a time. You cannot withdraw money from your account except under certain conditions but not before 5 years.
You canin through a bank or Post Office. Ability to online is limited.
5 Year Bank FDs
This is a variant of the regular Bank FD with a 5-year lock-in. They offer slightly higher interest rates compared to normal FDs (0.25-0.5% higher) but does not offer liquidity option- even premature withdrawal with the penalty is not possible.
The amount you canis limited to Rs 1,50,000. The interest you earn on your 5-year bank FD is fully-taxable and you will have to pay taxes on a yearly basis for the interest you earn for that period. TDS typically collected by banks is only 10% (20% in case you have not submitted your PAN) and if you happen to be in the 20 or 30% tax bracket, you need to pay the remaining interest while filing your IT returns.
Post-tax, 5-year bank FDs are not particularly attractive- especially for people in the 20 and 30% tax brackets since the post-tax returns (6-7%) are typically lower than other tax saving schemes.
National Savings Certificate (NSC)
interest rates are fixed in April every year. The current rate is 8.5% for 5-year lock-in NSCs, and 8.8% for 10-year lock-in NSCs.
The interest accumulated is fully taxable. However, one key difference here is that the interest amount is not paid out to the investor. Instead, it’s re-invested inand therefore can be considered as your in for the subsequent year. Needless to say, this is complex.
up to Rs 150,000 are eligible. You can in via your local post office.
Life Insurance Premium
This was almost the default tax saving option for years, However, over the last few years, most informed investors have learnt the perils of choosing this option
There are 2 kinds ofPolicies:
- Pure risk also called term life which ensures a risk to the life of the insured
- Risk+ investment: which pay you back money over time
While pure riskis something everyone with a dependant must have, it’s not an . is an expense- something you pay to ensure that your dependents are not left stranded should something unfortunate happen to you. Term is cheap and for a sum of about Rs 10,000, you can purchase a cover of Rs 1 crore.
The returns from and costs of-oriented insurance policies are not transparent and usually not attractive. We won’t go into length on this topic but suffice to say that you should not consider as a tax saving option.
National Pension Scheme
Scheme is a lot like in with its Safe, moderate and Risky options. The returns are not guaranteed.
You cannot withdraw until 60 and the corpus amount must necessarily be invested in an Annuity. The withdrawals are also taxable.
Contributions up to Rs 150,000 are eligible for deduction under Sec 80C. You canvia the specified list of NPS fund managers with points of presence operated through banks.
However, given the restrictions that come with NPS, it’s not a recommended option.
Pension funds are designed to provide you with an income stream post. They come in two flavours: Deferred Annuity and Immediate Annuity.
For deferred annuity plan, youannually until your . Once you reach your , you have can withdraw up to 60% of your accumulated corpus and have to re- the remaining in an annuity fund which will give you a monthly pension.
When it comes to immediate annuity plans, youa bulk amount one-time and get monthly pension from the next month itself. You would typically use these to your corpus.
Pension funds are not very popular because of the sub-par returns (around 6%) that they give and the restriction they come with. That’s less than India’s inflation rate and not even half of whatprovide in the long run.
Pension funds are offered by a number of providers. Contributions up to Rs 150,000 are eligible for deduction.
Senior citizens savings scheme
The senior citizens savings scheme is a product aimed at senior citizens to save tax. It can only be opened by people who are above 60 years old.
There is a maximum cap of 15 lakhs and aof 5 years. You may withdraw the money before subject to penalty as follows
- More than 1 year but less than 2 years – 1.5% of deposit amount
- More than 1 year but before maturity – 1 % of deposit amount
This scheme is offered via the post office.up to Rs 150,000 are eligible.
EPF (Employee Provident Fund)
For salaried employees, this is not necessarily an optional thing. You will need to follow your company’s policy with some leeway available. However, a lot of people forget that the amount contributed to EPF is also eligible for 80C deduction.
EPF is typically deducted from your salary every month and it includes 12% of your Basic salary + DA up to a maximum limit of INR 6500 per month (inclusive of the optional matching employer contribution).
You can withdraw EPF when you change jobs. However, your accrued amount will be taxed as other income. If you withdraw EPF after 5 years, you do not attract any tax. Withdrawal after 5 years is based on qualifying criteria.
The interest rate varies every year (for e.g. interest rate in 2010-11, was 9.5%, while in the previous five years it was 8.5%). For 2014-15, the interest rate is fixed at 8.5%.
Other Tax Saving Investments & Expenses
Apart from voluntary contributions we make, there might be some forced savings/ expenses that already qualify for tax saving.
Tuition Fees for Children: Tuition fees for up to 2 children are covered under section 80C. Please note that it covers tuition fees only and not development fees or donations.
Home Loan Principal Repayment: You are eligible for tax exemption for the repayment you make towards your home loan principal. Do note that the interest component is not eligible for tax benefits.
The Scripbox recommended portfolio of tax saving ELSS funds will help you in the with the best prospects and also provide you with the convenience of online and tracking.
Please note that this article does not attempt to be a comprehensive tax saving guide, only a listing of the most common alternatives. Other alternatives include Infrastructure bonds, PO deposits etc. It’s also recommended that you get proper tax advice for your situation.
A shorter version of the above article appeared in print and online versions of Hindu Business Line.
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