Income Tax Alert – It is that time of the year when the urge to invest to save tax is at its peak among the taxpayers. Section 80C gives a wide range of investment options to the taxpayers and from here you can save up to Rs 1.5 lakh in tax. The options are many, so it is important that you choose the most suitable investment keeping in mind your financial goals and risk appetite. Praleen Bajpai, Founder, Finfix says, “Tax saving instruments are chosen at the end of the financial year only to meet the requirement of that year and should not be done at all. Any tax saving option should be part of the overall financial plan. Keeping this in mind, here are the options available in terms of cost, safety, returns and lock-in period. (Income Tax Alert)
Public Provident Fund
Public Provident Fund (PPF) is one of the most popular tax saving options. It has features like investment, withdrawal, sovereign guarantee and tax exemption. PPF comes with a lock-in of 15 years, after which you choose to increase your investment in blocks of 5 years. The current interest rate on PPF is 7.1%, which makes it better than bank fixed deposits (FDs). However, the PPF rate is reviewed every quarter.
Tax Saver Fixed Deposit
Investments made in 5-year tax-saving fixed deposits are deductible, the interest earned on it is fully taxable and is subject to tax deduction at source (TDS). The taxable interest can to an extent offset the tax benefit received on the investment, especially for those in the 30% tax bracket. For example, the post-tax return on FDs offering 5.5% interest rate would be 5.2%, 4.3% and 3.7% for the tax slabs of 5%, 20% and 30% respectively.
National Savings Certificates
National Savings Certificate or NSC provides guaranteed returns, which are revised by the government on a quarterly basis. It has a lock-in of 5 years and the interest earned can be claimed as deduction under section 80C. Interest is not paid to the investor and is instead reinvested, which means the taxpayer can claim it as an investment under 80C. However, the interest earned in the fifth year of holding is not reinvested and paid along with the total earned amount, hence cannot be claimed as deduction.
Traditional Insurance Plan
Life insurance plans have the highest sales during the January-March period, when taxpayers are in a hurry to invest for tax savings. Agents promise deduction on premium, tax-free income on maturity and insurance cover. According to Lowai Navlakhi, president of the Association of Registered Investment Advisors (ARIA), single premium policies chosen to eliminate 80C limit investments may not qualify for tax breaks on maturity. Also, the insurance cover offered is inadequate and the yield is only 2-4%. Endowment or traditional insurance policies are probably the worst way to save tax. Security-seeking taxpayers should invest in NSC and PPF instead of endowment plans.
Equity Linked Savings Scheme
Financial advisors recommend investing in Equity-Linked Savings Schemes (ELSS) as the best tax-saving investment. Praleen Bajpai says, “ELSS helps in saving tax by offering to build assets with equity over a long period of time. ELSS funds have the shortest lock-in of 3 years among all 80C investments, and they are also more flexible. Navlakhi said, “The simplicity of ELSS funds as well as the clarity that it is 100% in equity, Making them the preferred product for tax savings.”
Unit-Linked Insurance Plan
Unit Linked Insurance Plans (ULIPs) are market linked insurance products. Premium is eligible for deduction under section 80C, if the annual premium does not exceed ₹2.5 lakh. Income on maturity or death claim is tax free and partial withdrawals after 5 years lock-in are also not taxed but the amount should be less than 20% of the fund value. Here the policyholder also gets life cover. According to Navlakhi, ELSS funds score higher than ULIPs when compared. “Ulips do not offer easy exit or transfer option in case the policyholder wants to switch to another ULIP policy or a better fund manager,” he added. Investors in ELSS can switch to another fund after a lock-in of 3 years. The advantage of ULIPs over ELSS is that investors can switch between debt and equity at little or no cost.
National Pension System
Salaried 10% of Basic Pay and Self Employed Taxpayers 20% of total gross income can claim deduction for investment made in NPS (National Pension System) Tier-1. For example, if your basic salary is Rs 3 lakh and you have invested ₹ 80,000 in NPS, then only ₹ 30,000 can be deducted under 80C. However, you can claim an additional deduction of ₹50,000 under section 80CCD(1B). (Income Tax Alert)