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A good tax-saving investment must be an investment first and a tax-saver later. There are a number of schemes available to reduce your tax liability. Here is a closer look at six popular options.
1. Equity-linked savings scheme (ELSS) funds
ELSS funds are pure equity funds and have a three-year lock-in. The amount invested (up to Rs 1.5 lakh per annum) is eligible for tax deduction under Section 80C.
The realised gains are treated as long-term capital gains and are taxed at 10 per cent. However, gains up to Rs 1 lakh in a financial year are tax exempt.
2. National Savings Certificate (NSC)
NSC is a popular and safe small savings instrument that combines tax savings with guaranteed returns. Backed by the government, this is one of the safest investment options available at post-offices.
Investments
Minimum: 1000 per annum
Maximum: No limit
Interest: 7.7 per cent compounded yearly
Tenure: 5 years
3. Public Provident Fund (PPF)
Public Provident Fund is a long-term savings instrument established by the Central Government, which offers tax benefit on savings and withdrawal after the lock-in period.
Investments
Minimum: Rs 500 per annum
Maximum: Rs 1.5 lakh per annum
Interest: 7.1 per cent compounded annually
Tenure: 15 years. One can extend the account in blocks of five years on completion of 15 years.
4. Unit-linked insurance plan (ULIP)
ULIPs are hybrid products that mix life insurance and investments. Like any other life insurance product, these offer life cover along with investment. In terms of transparency, returns, and liquidity, ULIPs fare quite poorly, particularly in comparison to ELSS. They also do not offer adequate insurance.
Confused between the old and new tax regime? This tax calculator gives you the answer.
5. Sukanya Samriddhi Yojana (SSY)
The Sukanya Samriddhi Yojana (SSY) is a tax-free small savings scheme for the girl child. It was launched on January 22, 2015. The parents or legal guardians of a girl aged ten years or below can open an SSY account at any post office in India doing savings bank work, or at any branch of a commercial bank authorised by the central government.
Investments
Minimum: Rs 250 per annum
Maximum: Rs 1.5 lakh per annum
Interest: 7.6 per cent compounded annually
Tenure: 21 years from the date of account opening. It can be closed prematurely after five years in certain cases.
6. National Pension System (NPS)
The NPS is a Government of India initiative to extend pension benefits to all Indian citizens. It is mandatory for central government employees and the employees of some state governments to invest in the NPS. As per a government directive, private-sector employees will now be given a choice between the Employees' Provident Fund Organisation (EPFO) and the NPS. The employee contribution is generally 10 per cent of the basic salary and DA, with a matching contribution made by the employer. Your capital is not protected as the NPS invests a certain amount in equities. The returns are, therefore, market-linked.
Liquidity
In the case of the NPS, after three years of being in the scheme, you can withdraw up to 25 per cent of the contributions for defined expenses. You can make up to three withdrawals during the tenure.
Exit option
If you wish to exit before age 60, you must use 80 per cent of the corpus to buy an annuity. You can withdraw 20 per cent of your corpus, but it will be taxed as per your income tax slab. Sixty per cent withdrawals from the NPS are tax-free for those who exit at 60 years. The balance 40 per cent needs to be utilised towards the purchase of an annuity. However, if the total corpus does not exceed Rs 5 lakh, the entire amount can be withdrawn as a lump sum without any need to purchase an annuity.
The pension from the annuity plan is added to the income and taxed as per the applicable slab.
Of the various options available under section 80C, the most beneficial is equity-linked savings scheme (ELSS). As an equity mutual fund, ELSS is especially useful for salaried people who usually already have some amount going into fixed income products through PF deductions. To balance that fixed income exposure, equity-based investments are the best option. Moreover, at three years, the lock-in for equity-linked saving schemes is shorter than other tax-saving fixed income options.
To view the current rates on small-savings schemes, go to vro.in/s34211
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