This article is the first one in a 5-article series on ‘Guide to Saving Income Tax Legally’.
In this series, we will discuss everything from investment options which help save income tax to striking the right balance between different tax saving options.
We start with the roundup of all types of tax saving investment options available out there.
India ranks high when it comes to tax evasion. In fact, according to data released by the government, just 1 percent of Indians paid taxes in 2013*, which is one of the least compared to many advanced democracies in the world.
And for those who do pay, they lose by paying more taxes than required due to inadequate information.
In this list, we look at all tax saving investment options which help you to save taxes legally under (Section 80C) :
Equity Linked Savings Scheme (ELSS):
ELSS investments are considered to be the best option when it comes to tax saving investments. These are equity schemes which have the same amount of market risk as diversified mutual funds.
They have consistently given twice as much returns as Fixed Deposits averaging between 16-23%
Since they come with a lock-in period of 3 years, any capital gains are long-term by default, thus shielding us from the taxes and safeguarding against market fluctuations.
Their investments, gains and withdrawals all are tax-free and have zero management cost.
Within ELSS, there are growth, dividend and dividend reinvestment options. Growth is a cumulative option allowing your investment to grow till maturity, dividend gives you periodic tax-free dividends, while the reinvestment option gives you additional units in respect of the dividend payout.
Employee Provident Fund (EPF)
It is an employee benefit scheme allowing the salaried class in the private sector to park a part of their salary (12% of basic plus DA) with the government.
Managed by the Employees Provident Fund Organization (EPFO), it helps employees in the event of retirement, disability, sickness, or even unemployment. An additional benefit is that your contribution is matched by the employer. The total amount deposited with the government earns a fixed Interest rate every year but can only be withdrawn tax-free after 5 years, unless it is required for the specific purposes.
The returns in EPF are 8.8% this year, all tax-free.
Public Provident Fund (PPF)
This product is like EPF, but an employee can invest in PPF on their own. Say if you have some extra savings and want to avail the benefits of EPF, you can open a PPF account with a bank directly. Your employer won’t be involved here. Government invests the money in various projects they undertake and pay you a fixed Interest rate every year.
Investment in PPF can be up to 1.5 lakh (tax-free) starting from Rs 500, and the current interest rate is 8%.
Both EPF and PPF are classified as debt instruments (earning a fixed interest rate). Though the maturity of EPF is based on the employee’s service, PPF has a lock-in of 15 years, allowing first withdrawal after 5 years.
Long-term Fixed Deposit (FD)
The most common debt instrument in India, one can just walk to a bank and open a Fixed Deposit (or just go online and invest). Intended for people who want regular fixed income, FD provides you with a better interest rate than the rate on a Savings account until the defined maturity date.
However, no premature withdrawals are allowed if you are to avail tax benefits. Even so, the Interest income is taxable.
One can invest from anywhere between Rs 100 to 1.5 Lakh. You get an interest of 7% – 7.5%.
Term Life Insurance
One of the fastest growing sectors in India, life insurance products come in many forms and cater to the investment needs and objectives of varied investors. The ones providing tax benefits are referred to as term Insurance policies.
Though they don’t provide any capital appreciation throughout the tenure of the policy, they pay the insurance cover (sum assured) in the event of an unforeseen demise of the policyholder.
Unit Linked Insurance Plan (ULIP)
A product offered by insurance firms, ULIPs provide the dual benefit of risk cover for the policy holder along with investment option. The premium paid by the investor is partly used to provide insurance cover and the remaining is invested in the various financial instruments.
Investors have the option to choose the type of investment (debt vs. equity or both) based on their needs and risk appetite. The units they are allotted have a Net Asset Value (NAV) that changes on a daily basis based on the performance of the market.
The biggest benefit is that ULIPs provide for tax-free gains and surrender charges after 5 years are nil. In the case of premature exit, a surrender value is payable to the holder which is expressed as a percentage of the fund value (this varies depending on what the insurer would include in the surrender charges, and can be clarified upfront).
The premiums are much higher than term insurance plans though and exiting immediately after the initial 5 years is not recommended. These are more of long-term instruments.
National Saving Certificate (NSC)
These are savings bonds floated by the Indian Government. They are primarily used for small savings or income tax rebates. They can be purchased from Post Offices for 5 (gets you 8.5% return) or 10-year tenures.
One can also avail of loans against them, but the primary purpose for many is tax savings. However, the Interest income is taxable depending on the tax slab you fall in.
A minimum of Rs 500 is needed to invest in them.
Some other options
There are other ways to save on taxes too, apart from Section 80C:
- National Pension System (NPS): An exempt-exempt-tax (EET) product, 60% of the corpus is taxable while the rest is not. This scheme allows for an additional tax benefit of Rs 50,000 over and above the Rs 1.5 lakh exemption allowed for Section 80C instruments. If your mobile number is linked to you Aadhar card, you can invest by logging into NSDL website and following the steps.
- Section 80D: This is to allow tax deductions for self/family and parents on the medical insurance premiums paid. There is an additional exemption to the amount of Rs 5,000 on health check-ups also. This all is in contrast to the rebates allowed in Section 80C which are on the investments made in a range of financial instruments.The exemption is for Rs 25,000 for self/family, with an additional exemption of Rs 25,000 for parents if they are covered as well. In case any of self/family or parents are senior citizens, the exemption becomes Rs 30,000.
- Company Tax Reimbursements: Companies also provide a few ways to allow for tax benefits to their employees. Most common are the petrol expenses if the vehicle is used for official purposes, spending on newspapers or magazines that allow for one to excel in the field they are working in for the firm. There could be other ways to save as well depending on benefits certain companies provide.
With so many options available to save on the tax outgo, why not use them fully to our benefit and pay the taxes we then owe to the government? After all, these are then used for the progress of our own country!
*Statistic sourced from here
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Alok is an Engineer (Gold Medalist), MBA in Finance from IIFT, and FRM certified. He has worked with many renowned Investment Banks in the US. He loves traveling, photography and manages his portfolio of investments in the Indian Stock Markets. He also writes at alok-singhal.com