Individuals are eligible for tax rebate on their investments u/s 80 (C ) of IT act to the maximum limit of Rs. 150000.00 in a financial year. There are multiple options of instruments that provide tax rebate under Section 80C (Chapter VI A) of IT Acts 1961. Here I have analyzed eight widely preferred instruments available to tax- payers for investments on the basis of their returns; safety, flexibility, liquidity and taxability. They are;
- Public Provident Fund (Returns: 8.70% for 2015-16)
- Equity Linked Savings Scheme (ELSS) (Returns: 17.80% for past 3 years)
- ULIPS (Returns: 9.80% for past 3 years)
- National Pension Scheme(Returns: 9.50% for 2015-16)
- Sukanya Samriddhi Scheme(Returns: 9.20% for 2015-16)
- National Savings Certificate (Returns: 8.50% for 5 year Plan & 8.80% for 10 years plan
- Fixed deposits with bank with tax saver scheme(Returns: 8/8.50% for 2015-16
- Life Insurance Premium (Returns: 5.50/6.00% for 20 years Plan)
- In addition to investments in the above instruments, repayment of installments and interest paid on housing loan by individuals are also eligible for income tax exemption. Therefore, buying a house under housing loan is also a good tax saving investment.
Public Provident Fund (PPF) Account
PPF is one of the top ranked investments made by the individuals because of following advantages.
- The balance available in PPF account is free from court attachment.
- The principal and interest earned on PPF account is exempted from income tax and wealth tax.
- The interest rate on PPF account is now linked to the bond yield in the secondary market and made it even better investment. The PPF interest linked to the bond yield guarantees the returns on investments in line with the prevailing market rates. For the year 2015-16, interest on the balance of existing PPF accounts bear interest at the rate of 8.70% per annum. However, there is some bad news to investors that the Government is likely to reduce the interest rates on various small savings schemes including PPF for the year 2016-17. The interest rates on various small savings schemes for every financial year will be notified by the Government before April 01st of that year. You may re-asses the scheme with other options if the rate offered for 2016-17 is not attractive.
- Guardians are allowed to open PPF accounts in the name of minors
Opening of account:
The PPF account could be opened by individuals with an initial deposit of Rs.100.00 in any public sector bank (including State Bank and its associates). PPF account could also be opened in Post office and some of the private sector banks. Nomination facility is available in PPF account are permitted. Premature closure of a PPF account is permissible only in case of death. NRIs and HUFs are not eligible to invest in PPF account.
Minimum and maximum Investment in a year
The investor has to deposit minimum of Rs.500 in a financial year. The maximum amount that could be deposited in a financial year is Rs.1.50 lakh. If a depositor fails to deposit minimum of Rs.500 in a financial year, he can regularize the account by paying Rs.50 penalty in the succeeding year. The entire amount in PPF account is due for payment after completion of 15 years (. Illustratively, if you have opened a PPF account during the financial year 2013-14, the entire amount lying in your PPF account with accrued interest could be withdrawn any time after 01.04. 2029). Interest is calculated on the minimum balance available in the account between 5th and last day of every month.
Continuation of account after maturity
PPF account holders have an option of extending their accounts after the 15 year tenure with or without further subscription, for any period in a block of five years. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year. If you continue the account after 15 years, with continued deposit, withdrawal up to 60 per cent of the balance at the beginning of each extended period (block of five years) is permitted.
Depositors can also take a loan if they require it against balance available in the PPF account but it cannot exceed 25% of the balance in the preceding year. Loans could be taken from the third year onwards till the sixth year. From the 7th year onwards partial withdrawals from PPF account is permitted.
- ELSS (Equity-Linked Savings Scheme)
ELSS is an open ended diversified equity fund offered by mutual funds. In this scheme the investor’s money is chiefly invested in portfolio of equity shares. In the recent past, investment in ELSS has given very good returns to the investors even in the bearish market.
Highlights of ELSS funds
- The 3 years lock-in-period is the shortest among the tax saving instruments and investor can safely recycle his investments every three years and claim tax benefits on the reinvested amount.
- No tax payable on the profit earned from ELSS.
- The minimum investment is as low as Rs.500.00
- There is no compulsion to continue investments in subsequent years.
If you wish to invest in ELSS, you must remember that the money deposited by them in the scheme is reinvested by funds manager in equity related investments. Such investments are exposed to market risk. Even a fund which is showing very good performance at present may end with disappointing returns at a future date. Investors who have appetite for risk could consider the option of investing in ELSS.
- Unit Linked Insurance policies (ULIPs )
ULIP is an integrated product of ‘insurance and investment’ developed and marketed by life insurance companies. ULIP offers the investors the advantage of both insurance and investment under the single plan. In this integrated scheme of investment and insurance, a part of the premium paid by the policy holder is utilized for insurance cover and rest of the premium portion is utilized for the investments in various equity/debt schemes.
The face value of ULIP policy holders are indicated in units. The units of ULIPs are allotted on the basis of premium paid by the policy holder. These units have Net-Asset Value (NAV) which is determined on net rate of returns on money reinvested by funds manager in equity/debt related instruments. The investors who are shy to invest in equity related policy have an option to go for a policy of fully investing in debt funds. The policy holders have the option to switch from one fund to other. They may switch the money from debt funds to equity funds or from equity funds to debt funds at later date. The advantage of switch facility available to Policy holders of ULIP is that they can switch the funds without the risk of levy of any capital gain tax.
- Sukanya Samriddhi Scheme
The money deposited in Sukanya Samriddhi account gets you a tax break within the overall cap of Rs.150000/- under section 80C of Income Tax Act. The investor of Sukanya Samriddhi Scheme gets 0.50% more returns on investment compared to the PPF account for the similar tenure.
The account can be opened by the parent or legal guardian of a girl child of less than 10 years of age. You as a natural or legal guardian of the children can open only one account in the name of one girl child and maximum two accounts in the name of two different girl children. In case of birth of twins or triplets, the condition of opening account only for two daughters is exempted. The account can be opened in any post office or designated branches of Public Sector Banks with an initial deposit of Rs.1000/-. Subsequent to initial deposit of Rs.1000/- you can deposit money to the account in multiple of Rs.100/-. No limit on number of deposits in a month/year. Deposit can be in lump-sum with maximum amount of Rs.150000/- in a financial year for the next 14 years. However minimum Rs.1000/- to be remitted to the account in a financial year failing which account is treated as discontinued and same can be revived with a penalty of Rs.50/- per year with minimum amount required for deposit for that year. The deposit matures on completion of 21 years from the date it was opened.The account can be closed before maturity only after the girl completes 18 years of age provided the girl is married. The scheme allows partial withdrawal of up to 50% of balance standing at the end of preceding financial year for the purpose of higher education or pre-marriage expenses, provided the account holder attains the age of 18 years.Pass book facility is available to the account holder.
- National Pension Scheme
Contribution towards NPS reduces your tax liability by availing the deductions u/s 80CCE which will be up to Rs.1.50 lakh and an additional deduction of Rs.50, 000/- under section u/s.80 CCD (1B) [applicable from FY 2015-16/AY 2016-17]. The eligibility of additional deduction of Rs.50000/- on NPS is a big incentive to investors. If you are in the tax bracket of 30% you will be able to save Rs.15450/- on investment of Rs.50000 u/s 80 CCD (1B) of income tax act.
The returns on NPS are based on the investments made on asset classes like equity fund (E), corporate bonds(C) and government securities (G). If you as a subscriber wish to take decision on allocation of your pension wealth across E, C and G asset classes, you can do so by opting active choice which is subject to maximum allocation limit for each type asset classes prescribed by PFRDA. You cannot opt for more than 50% of accumulated wealth in equity part of allocation.
In case you are unable to exercise the ‘Active Choice’ (hand-on) option on investments, the money will be invested under ‘Auto Choice’ option. In this option the investments will be made in a life-cycle fund, that is, investment will be spread among equity, corporate and government securities, as per pre-descripted formula based on age of the subscriber.
New Pension System (NPS) is built in two tiers structure viz. Tier-I and Tier-II accounts. Tier –I account is a compulsory account for those who wants to join the scheme. The subscriber has to contribute minimum of Rs.6000 every year either in lump-sum or in installments. The minimum contribution is Rs.500 at one time. There is no upper limit for number of transactions.
The tier-II is the voluntary account of the subscriber. Minimum contribution for opening a Tier-II account is Rs.1000/-. The account holder can deposit and withdraw money available in the account keeping minimum balance of Rs.2000/- in the Tier II account. Compliance of KYC formality like address proof, identity proof and age proof are common for both Tier-I & Tier –II accounts. PAN card copy and Bank account details are mandatory for opening Tier-II account. The subscriber has the option to choose separate schemes and separate PFM for Tier-I & Tier-II accounts. Subscriber who prefers to remit to tier II account in installments shall contribute minimum Rs.250 at one time and the minimum deposit of Rs.2000 in a year. There is no upper limit for the number of transactions.
- National Saving Certificates(NSCs) :
National Saving Certificates (NSCs) are issued at all Post offices in India. NSCs are one of the top tax saving instruments of individuals. The amount of investment in NSCs, along with other investments will qualify for tax rebate u/s.80 C. up to Rs.150000. But there is no restriction for higher investments in NSCs. Trust and HUF cannot invest in NSC.
Highlights of NSCs
- With effect from 01.04.2012, National Savings Certificates are issued in two series viz. NSC VIII issue and NSC IX issue. The maturity period of NSC VIII issue is for 5 years and NSC IX issues is for 10 years.
- Tax rebate can be claimed on Interest accrued on NSCs in a financial year u/s 80 (c) of IT Act.
- No tax deduction at source for interest received. (Interest income should be reflected in your tax return and tax if any on that should be paid.).
- Bank loans can be easily availed by pledging the NSCs as security for loan.
- The Investors can safely recycle his investments in NSCs on maturity [Five years (NSC VIII issue) or ten years (NSC IX issue)] and claim tax benefits on the reinvested amount.
- There is no compulsion to continue investments in NSCs in subsequent years
The amount of investment in NSCs, along with other investments will qualify for tax rebate u/s.80 C. up to Rs.150000. But there is no restriction for higher investments in NSCs.
Return on investments: Interest Rates on NSC VIII issue is 8.50 % p.a. Maturity value of a certificate of INR.1000/- purchased on or after 1.4.2012 shall be INR. 1516.20. (After 5 years.).
NSC IX Issue: Issued in the denominations of INR. 100/-, 500/-, 1000/-, 5000/- & INR. 10,000. Can be purchased by an adult for himself or on behalf of a minor or to a minor. No maximum limit for investment.
Return on investments: Interest Rates on NSC IX is 8.80 % p.a. Maturity value of a certificate of INR.1000/- purchased on or after 1.4.2012 shall be Rs.2366/- (After 10 years.).
- Tax Saver Fixed Deposits issued by Banks
An individual or HUF can invest in Tax saver fixed deposits of banks, not exceeding aggregate limit of Rs.150000.00 u/s 80 (C) of IT in a financial year is eligible for tax relief. The ‘deposit’ can be opened in single name or joint names of an adult with a minor or in the joint names of two adults, payable to either or survivor. Joint account cannot be opened for more than two people. In case of joint accounts, only the first named person in the ‘Tax Saver Deposit’ can claim the tax rebate. Banks accept Tax Saver deposit for a minimum period of 5 years. Nomination is permitted in tax saver deposits.
Interest payable on tax saver deposit is normally equivalent to interest paid by the bank to its other types of deposits for the same tenure. Normally all the banks offer 0.50% extra interest to senior citizen of age 60 years and above. In tax saver deposits, the deposit can be placed under reinvestment deposit scheme where principal and compound interest payable at the time of maturity or in fixed deposits with interest payable to depositor at half yearly or quarterly rest. Interest on tax saver deposits, is accounted as interest income of the depositor and tax on the interest paid is deducted at source.
The disadvantage of tax saver deposit is that it can neither be closed prematurely nor a loan can be availed against it. This ‘deposit’ cannot be offered as collateral security for any advance.
8. LIFE INSURANCE POLICIES:The core objective of buying life insurance policies is for providing salvage to the dependents on unfortunate death of the policy holder. The tax rebate on premium paid on insurance policy is meant to reduce the cost of insurance, as the return on investment on insurance is very ordinary compared to returns on other investments. There is nothing wrong, if an investor is planning to buy a life policy for the core purpose. However buying a policy purely for tax saving purpose is a bad idea. Not only the return on investments is very ordinary, the policy holder needs to keep paying premium throughout the term of policy even when other investments have already covered the upper limit of tax saving investments.
Investment in house property under Housing Loan
Housing finance availed by individuals for residential property from a bank or housing finance company has multiple benefits.
The benefits of investment made in residential property are;
- The repayment principal amount of loan, up to the Rs.150000.00 in a financial year is eligible for overall rebate u/s 80 ( c ) of IT Act. Stamp duty paid and registration fee paid on property purchased can also be included for tax rebate within the overall limit of Rs.150000 in a financial year.
- In addition to rebate on repayment of loan amount, the interest portion paid on housing loan offers a deduction up to Rs.150000.00 on taxable income separately under section 24.
- First time home buyers (the person who does not already own a house property in his name), who has availed a housing loan of Rs.25lakhs or below on or after 01.04.2013, can claim additional tax deduction of Rs.100000.00 (Rupees one lakh) on interest paid on that loan under section 80EEE subject to condition that the value of residential property should not exceed Rs.40 lakh (Rs.400000.00). If the interest paid is less than Rs.100000.00 (one lakh), in the first year, the unclaimed deduction can be utilized in the subsequent year.
- The appreciation value of house property is high in city/urban areas. It is good idea to buy residential property in city/urban area for investment purpose.
- If the house is not occupied by the owner of the house, he gets good rent in the urban area.
Disclaimer: The returns, safety, liquidity and tax-ability of the investments on tax saving instruments might have changed at this date or may change at a future date. The opinions and views published here may not be correct therefore opinion provided here should not be construed as investment advice to any individual/entity. The readers should review all the scheme information on their own or consult their financial advisors/charted accountants before dealing or taking investment decisions.