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Figure out the best tax saving instrument that suits you

Figure out the best tax saving instrument that suits you


(Evaluation of 10 widely preferred tax saving instruments)

The ultimate idea of buying any tax saving instrument is not just to reduce the tax liability for the year; we must get back good returns on the investments made by us. There are multiple options in investments that allow us a deduction of Rs. 1.50 lakh from our total income under Section 80C (Chapter VI-A) of IT Acts 1961. However, it is important to figure out which tax saving product is most suitable for our future needs.  In order to help those who do tax planning themselves, we have made the evaluation of the ten widely preferred tax saving instruments, on the basis of returns; safety, flexibility, liquidity and taxability of returns. Figure out from the below list which tax saving instrument suits you the most.

Terms of taxation used:

EEE (Exempt – Exempt – Exempt) EET (Exempt – Exempt – Taxable) ETE (Exempt – Taxable – Exempt) ETT (Exempt – Taxable – Taxable)

The first character represents Investment stage, Second Character represents earning (income on the investment) stage and the third Character represents the redemption (withdrawal) stage.

For latest iterest rates on investments in small savings scheme which are subject to change at every quarter, please click ‘Interest Rate’

The following schemes are eligible under section 80 C of Income Tax Act

  1. ELSS (Equity-Linked Savings Scheme)

Tax rule: EEE

Returns: Investment in ELSS has given very good returns to the investors even in the bearish market (18.5% average annualized return for 3 years, 17.50% in the past 5 years).

Equity-Linked Savings Scheme (ELSS) funds are currently considered top ranking tax saving instrument due to excellent returns they have generated in the past couple of years.

ELSS is an open ended diversified equity fund offered by mutual funds. In this scheme, the investor’s money is chiefly invested in the portfolio of equity shares. The investment in the scheme offers you income tax rebate u/s 80 (C) of IT act up to the maximum limit of Rs. 1.50 lakh in a financial year.

Caution: If you wish to invest in ELSS, you must remember that the money deposited by you 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 the appetite for risk could consider the option of investing in ELSS.

Axis long term equity fund, Birla Sunlife relief 96, DSPBR tax saver fund, Franklin India Taxshield Funds were some of the last year’s best performers. The returns from individual funds will be varied depending upon different portfolio held in each fund.

To know more on the scheme Click Equity Linked Savings Scheme (ELSS)

  1. Senior Citizens’ Savings Scheme:

Tax rule: ETE

Returns: 8.50% p.a (For Jan – March 2017)

From April 2016 onwards, the interest rate on all small savings schemes being notified by the Government on the quarterly basis instead of the earlier system of announcing for every year.

 The scheme is most suitable tax saving products and safe investment plan for the senior citizens. Investment in SCSS is eligible for tax exemption up to Rs.1.50 lakh u/s 80C of IT act. However, the disadvantage is that the income is liable to tax deduction at source (TDS) if it exceeds Rs 10,000 in a financial year. The depositor who may not have a taxable income but still have to file their tax returns to get back the excess TDS. Redemption proceeds are not added to the taxable income.

 The deposit shall be for an initial lock-in period of 5 years which can be further extended.  The scheme allows the depositors to operate more than one account in the individual capacity or jointly with the spouse (husband/wife). Any number of accounts can be opened in designated branches of all Public sector banks and selected private sector banks or post offices within the overall limit of Rs.15 lakh. The interest on SCSS accounts payable on the quarterly basis that is on 1st working day of April, July, October and January irrespective of deposit opening dates.

To know more about the scheme click SCSS

3.National Saving Certificates

Tax rule: ETE

Returns:  8.00% p.a (For January 2017 to March 2017).

NSC VIII issue is specially designed for individuals who are Income Tax assesses. The investor in the scheme is eligible for tax exemption up to Rs.1.00 lakh u/s 80C of IT act. However, there is no maximum limit for investment. No Tax deduction at source. Hence, the NSC holders do not have to take the pain of filing their tax returns to get back the TDS. Redemption proceeds are not added to the taxable income. Banks easily grant loans against the collateral security of the certificates. Further, the advantage in buying 5 years NSCs is that the accrued interest on NSCs purchased previous years are eligible for tax rebate. However, you have to remember that the interest received on NSCs is to be added to your taxable income and pay tax according to tax slabs.

To know more click details on NSC

4. National Pension Scheme (NPS)

Tax rule: EET* [*Redemption of 40% of the total corpus accumulated is tax-free) + Pension (annuity income) paid to the subscriber shall be included taxable income of the subscriber and same is taxed under eligible tax slab].

Returns: NPS has yielded average 9.50% return in the year 2015-16 average yield for past 5 years is 12.50%.

Besides tax savings, the scheme is useful to the individuals who save the money towards their retirement plans. Under Sections 80 CCD (1) and 80CCE of Income Tax, an investment of up to 10% of Basic Pay plus Dearness Allowance or a maximum of Rs 1.5 lakh, whichever is lower, is deductible from gross taxable income. A self-employed person may also contribute to NPS and claim tax deduction up to 10% of his gross income under Section 80 CCD (1). In addition to the overall ceiling of Rs.1.50 lakh, an investor can contribute Rs.50000/- to NPS and claim deductions under Section 80 CCD (1B). Hence the total tax benefit for investing in NPS under Section 80 CCD (1) and Section 80 CCD (1B) is Rs 2 lakh. Only an investor in Tier I account can claim the above tax benefits. Thus, NPS is also useful to those individuals who have exhausted the 1.50 lakh limit under 80 C. and wishes to save further by investing Rs.50000/- in NPS.

To know more click details of NPS

  1. Public Provident Fund(PPF) Account

Tax rules: EEE

Returns:  8.00% for January 2017 to March 2017.

PPF is one of the top-ranked investments all these years because of the following advantages.

  • The balance available in PPF account is free from court attachment.
  • The principal and interest earned on PPF accounts are 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.

 Now the PPF interest linked to the bond yield guarantees the returns on investments in line with the prevailing market rates. Therefore, PPF rate is no longer fixed and is likely to come down as interest rate fall.  Though interest rate offered is ahead of the present inflation rate, in terms of long-term potential the present rate of 8% p.a is not so attractive to the investors.

EPF A/c: You may re-asses the scheme with other options if the rate offered for 2016-17 is not attractive. Salaried individuals may save in Voluntary Provident Funds besides mandatory deduction of 12% from their basic salary towards EPF which offers interest at 8.75% at present. It is a voluntary option to be taken by an employee to save more towards their retirement and same to be communicated to the employer.

Click here to know more about PPF accounts.

  1. Sukanya Samriddhi Scheme

Tax rules (EEE):

Returns:  8.50% for January 2017 to March 2017

The money deposited in Sukanya Samriddhi account gets you a tax break within the overall cap of Rs.1.50 lakh 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 below 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 the case of the birth of twins or triplets, the condition of opening account only for two daughters is exempted.

The account may be opened either in an authorized bank or in a Post office with a minimum initial deposit of Rs.1000/-.

To know more CLICK Sukanya Samriddhi accounts

7.Unit Linked Insurance policies (ULIPs)

Tax rule: EEE*

Returns: 10- 12% in 2015-16, actual returns are likely to be lower after charges levied by the ULIP funds).

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 policyholder is utilized for insurance cover and rest of the premium portion is utilized for the investments in various equity/debt schemes.

Investment in ULIP is eligible for deduction up to Rs 1.50 lakh deduction either under section 80C (life insurance) or 80CCC (pension) of Income Tax Act.

*Tax benefits on maturity proceeds of ULIPs: For the policies purchased up to 31.03.2012, if the premiums paid is less than 20% of sum assured, then under section 10(10D) of the Income Tax Act the entire maturity proceeds is exempt from income tax. For the policies purchased after 01.04.2012, if the premiums paid is less than 10% of sum assured, then under section 10(10D) of the Income Tax Act, the entire maturity proceeds are exempt from income tax. However, Premiums of ULIPs must be paid regularly and kept it in force for 5 years to claim deductions u/s 80C of Income Tax Acts. If the policyholder discontinues paying the premium before 5 years, he will not be eligible for tax benefits and any deductions claimed in the previous years shall be added back to his income in the year in which ULIP is closed.

Caution: You must remember that the money invested in ULIPs is associated with market risk. Any loss in the investment made by the fund’s manager is borne by the policyholder. Even a fund which is showing very good performance at present may end with disappointing returns at a future date. Investors who have the appetite for risk could consider the option of investing in ULIPs.

TO know more click details of ULIPs

  1. Tax Saver Fixed Deposits issued by Banks

Tax Rule: ETE (Interest on tax saver deposits, is accounted as interest income of the depositor and tax on the interest paid is deducted at source.)

Returns: 7-7.5% p.a (Normally matched with deposits rate of 5 years fixed deposits of the concerned bank)

An individual or HUF can invest in Tax saver fixed deposits of banks, not exceeding the 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. The joint account cannot be opened for more than two people. In the 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 facility is available for tax saver deposits.

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.

CLICK below to have a quick glance on

Deposit rates of 39 public & private sector banks

 9.   LIFE INSURANCE POLICIES:

Tax rule: EEE

Returns: Very ordinary

Investment in ULIP is eligible for deduction up to Rs 1.50 lakh deduction either under section 80C (life insurance) or 80CCC (pension) of Income Tax Act.

The core objective of buying life insurance policies is for providing salvage to the dependents on the unfortunate death of the policy holder. The tax rebate on premium paid on an 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 policyholder needs to keep paying premium throughout the term of policy even when other investments have already covered the upper limit of tax saving investments.

To know more  (CLICK) How to buy insurance policies

  1. Saving through investment in house property

Housing finance availed by individuals for residential property from a bank or housing finance company has multiple benefits. There is a rate war going on in Housing Loan Segment. SBI is offering 8.9% per annum, IOB is offering 8.65% and Bank of Baroda has come out with 8.35% pa. If you have not yet invested in house property, it is the right time to invest.

The borrower is eligible for tax deductions up to Rs.1.50 lakh u/s 80 C for the loan amount repaid. The stamp duty paid, registration fee paid is also eligible tax deduction u/s 80 C up to the overall limit of 80C. In addition to the above separate deduction of Rs.1.50 lac is allowed for interest paid on housing loan. The first time borrowers who have availed a housing loan of Rs.25lakhs or below on or after 01.04.2013 are eligible to claim the further tax deduction of Rs.100000.00 (Rupees one lakh) on interest paid.

 For more detail: (Click) Housing Loans

Related articles :

Budget 2017: Income Tax slabs for individuals

Benefits under various tax saving provisions of income tax Acts

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