Friday, February 17, 2012

Best Tax Saving Options Available for Investment


With the financial year inching towards its end, we have less than 6 weeks to make investments to save/reduce our Income Tax Liability for this financial year. Most of us know the various tax saving options that are available for us. I have even written about them in some of my earlier posts like "How to Save Income Tax" and "Life Stage Based Tax Saving Portfolio". This article is just a recap/synopsis of the best tax saving options that are available to the Indian Citizen.

The Best Tax Saving Options are:

1. Employee Provident Fund
2. Public Provident Fund
3. National Savings Certificate
4. Tax Saving 5 year Fixed Deposits
5. Infrastructure Bonds
6. Life Insurance and
7. Health Insurance

If you are wondering, "Where are the ELSS and ULIP's? Don't they offer Tax Benefits under Section 80C?". Well, I have intentionally left out Equity Linked Saving Schemes (ELSS) & ULIPs from this List. Because:
1. ULIPs havent performed as well as their peer tax saving instruments. Moreover, the charges involved are still high and the markets are choppy and these ULIP plans have caused severe losses to Investors.
2. ELSS Schemes may not be part of the Tax Saving Instruments list, after this financial year. As a result, they may not perform as well as their peer MF schemes. To know more about this, visit my blog post titled Bad News for ELSS Investors

Though you might think that, getting a 30% tax rebate on investments this year would be a good enough return, remember that your investment will be returned to you only after a mandatory lock-in period of 3 or 5 years and by then, if the ELSS scheme or the ULIP doesn't perform well, your investment may not be worth even as much as you invested. That is why I left them out from this article.

1. Employees Provident Fund (EPF)

This scheme offers a total yearly exemption of INR. 1,00,000 as mentioned in the Income Tax Act Section 80C.

Average returns: 9.5%

Maturity period: One can withdraw the entire amount in instances of leaving job, retirement after 58 years of age or taking VRS. Partial withdrawal can be done for home, medical or marriage related expenses though. To know more about Partial Withdrawal of your EPF Click Here

How to Buy: Usually around 12% of your Basic salary is deducted every month from your pay and is remitted into your EPF Account and is automatically considered for your Tax benefits. So, you don't need to go anywhere to buy this.

Returns Taxable?: Yes, if you withdraw within 5 years, No, if you withdraw after 5 years.

Drawbacks: None

2. Public Provident Fund (PPF)

PPF is a long-term, statutory scheme run of the government. As with the EPF, this tax saving option too falls within the Section 80C of the Income Tax Act in India.

Average returns: 8.6% compounded annually

Maturity period: 15 years

How to Buy: State Bank of India or some of the Nationalised banks or at designated post office branches.

Returns Taxable?: No

Drawbacks: This is a long-term scheme with a maturity period of 15 years. So, it does not suit short-term needs.

3. National Savings Certificate (NSC)

This is similar to a Bank Fixed Deposit, only that, the deposit taker is the Government of India. This scheme falls under the Section 80C of the Income Tax Act of India. Annual interest earned is deemed to be reinvested and qualifies for tax rebate for first 5 years.

Average returns: 8% compounded half yearly

Maturity period: Usually 5-10 years.

How to Buy: Nationalized Banks, post office or any broker.

Returns Taxable?: Interest income is taxable but no TDS.

Drawbacks: This is a long-term scheme with a maturity period of more than 5 years. So, it does not suit short-term needs.

4. Tax Saving 5 year-Bank Fixed Deposits

Investment up to Rs 1 lakh in these special tax saving bank fixed deposits are eligible for tax deduction under Section 80C. This scheme neither allows the encashment of the money prior to completion of the 5 years term nor can this be used as the security against any loan.

Average returns: 9-9.5% annually. Rate of interest varies from one bank to another.

How to Buy: Available at any Nationalized or Private Bank.

Maturity period: 5 years

Returns Taxable?: Interest income taxable on maturity.

Drawbacks: This is a long-term scheme with a maturity period of 5 years. Plus, you cannot close or use this deposit as security for any loans.

5. Infrastructure Bonds

Over and above the deduction allowed by the Section 80C, you can save income tax on investments upto Rs 20,000, by investing in different infrastructure bonds. Covered by the Section 80 CCF of the Indian I-T Act, these bonds are becoming very popular. You can visit the article titled Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits

Average returns: The rate of interest varies from 8% to 9%.

Maturity period: 5 to 10 years.

How to Buy: Brokers, DEMAT accounts etc.

Drawbacks: This is a long-term scheme with a maturity period of 5 - 10 years. So, it does not suit short-term needs.

6. Life Insurance Premium

Any premium payable by an investor to provide Insurance cover to his life is eligible for deduction under Section 80C.

Average returns: 6-7%. Apart from that, this helps one plan for the unforeseen events in his or her life.

Maturity period: Depends upon length of policy.

How to Buy: Contact your nearest Bank that offers Insurance policies or contact an Insurance Agent

Returns Taxable?: No.

Drawbacks: None. Some insurance premiums may not be eligible for tax benefits. So you may want to visit the article titled Do Insurance Policies Really Help Save Tax? to ensure that your premium payments are eligible for tax benefits.

7. Health Insurance Premiums

Popularly known as Mediclaim Policies, these insurance schemes come within the Section 80D of India's Income Tax Act. These policies offers a maximum deduction of Rs 35,000 ever year. This deduction is calculated in addition to any other tax saving done as per the Section 80C or any other sections.

Average returns: None. Benefits available only when the Insured is ill or needs medical care

Maturity period: Depends on the length of policy.

How to Buy: Contact your nearest Bank that offers Insurance policies or contact an Insurance Agent

Returns Taxable?: No. No money is returned to the insurer at the end of the policy duration

Drawbacks: If you dont fall sick during the insurance period, the money you pay wont be returned to you.


Happy Tax Saving...

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