Your lump-sump investments may not necessarily stand you in a sweet spot if your investments are made arbitrarily during the year-end. They need to be planned well in advance throughout the year.
Lessons:
- Plan your tax-saving instruments – don’t leave it for the last hour.
- Even tax-saving investments can be routed through systematic plans.
- Most of the tax-saving investments are for a minimum of 3 years.
- Determine which investment option to save taxes suits you the best.
- Investments with mere intention of saving taxes might backfire on you.
It’s that time of the year when most of the individuals are found scrambling to invest in tax-saving instruments just before the financial year-end. Currently, Section 80C of the Income Tax Act allows a deduction of up to Rs.1 lakh from the gross total income. Plus another Rs. 20,000 for investments in infrastructure bonds if this Rs.1 lakh limit is exhausted.
Let’s have a look at some of the tax-saving options available for individuals:
1) Public Provident Fund (PPF)
Public Provident Fund is a long-term statutory scheme of the Central GOI. Currently, the interest rate offered through government-backed small savings scheme is around 8%, which is compounded annually. On maturity, you pay no tax under Section 80C.
This long-term scheme is for 15 years; hence if your investment horizon is short-term in nature, PPF is not meant for you as it locks your liquidity for a relatively long period of time. In this scheme, you need to invest a minimum deposit of Rs.500 and up to a maximum of Rs.70,000 in a financial.
2) Unit-linked Insurance Plans
Unit-linked Insurance Plans (ULIPs), which are eligible for Section 80C tax rebate, are investment products that provide dual benefits of life insurance and savings element as a one stop solution for an individual’s financial goal. However, if you don’t need insurance, going with ULIP is not the best investment bet on the horizon.
Few corrective measures are initiated by Insurance Regulatory and Development Authority as it hikes the threshold limit for ULIPs from lock-in period of 3-5 years. IRDA also mandated a minimum assurance of such plans. Now, the policyholders can also opt for premature exit without any penalty.
3) Equity-linked Savings Scheme
Equity-linked Savings Scheme (ELSS) is mutual funds that help you save taxes under Section 80C as well as generate decent long-term returns from the equity markets. Such schemes are typically characterized by a three-year lock-in period.
However, the tax benefits of ELSS will be phased out with the Direct Tax Code (DTC) starting from 1st April, 2011. But, the revised code mandates that existing ELSS funds will be able to claim tax-exemptions. So, this might just be your last opportunity to put money is lucrative tax-saving mutual funds.
4) 5-Yr Bank Fixed Deposits
Since 2006, Bank Term Deposits which are of over 5 years tenure and upto Rs.1 lakh are allowed exemption under Section 80C of the Income Tax Act, 1961. You must have deposits necessarily in the list of scheduled banks mentioned by RBI.
Most of such tax-saving fixed deposit avenues are of fixed tenure and do not allow premature withdrawal facility. Further, such term deposits cannot be pledged to secure a loan. Most importantly, the biggest drawback of this scheme is that the interest for the amount deposited is taxable.
5) Employee’s Provident Fund
It is mandatory for the salaried individuals to contribute 12% of the sum of basic pay and dearness allowance to Employee’s Provident Fund (also known as EPF). The employers deduct this sum from the monthly payroll of their employees under a social security scheme akin to a forced-saving towards retirement planning.
EPF provides benefits like fixed-income instrument that allows tax benefits under Section 80C at the time of investment. As the EPF returns are tax free on maturity, the employer must make a similar contribution to the EPF.
6) National Savings Certificate
The 8% returns from National Savings Certificate (NSC) are not only assured and tax exempted under Section 80C, but also government guaranteed. Moreover, there is no upper limit in NSCs on the maximum amount that you can invest in a fiscal year.
This small saving scheme offers tax-free initial deposit for 6 years. However, interest in NSC is taxable. As NSC is a cumulative scheme, the interest for the first 5 years is eligible for a deduction in which the interest is reinvested and qualified under NSC fresh deduction.
7) Infrastructure Bonds
In Union Budget 2010, Finance Minister Pranab Mukherjee proposed the deduction for funds flowing in long-term infrastructure bonds in India up to Rs.20, 000 under Section 80 CCF of the IT Act, 1961.
These bonds issued by RBI-notified entities carry long tenures of 5-10 years for facilitating investment in infrastructure projects within the country. The interest earned can vary from 7.5% to 8.5% depending upon the issuer and investment option chosen. For the investors at the highest tax bracket, such investments can bring in savings of up to around Rs. 6000.
8) Insurance, Health Premiums and Tuition Fees
You can claim tax benefits for the health insurance premiums to the extent of Rs. 15000 under Section 80D. Moreover, you can also claim an equal amount of deduction for buying medical policies for your parents. Any amount that you pay to life insurance premium to secure yourself and your family is allowed to have a tax break under Section 80C.
If you’re paying tuition fees for your children’s full-time education, you are eligible for tax deduction under Section 80C. Mind you, the said tax benefit is not for the donations paid to such institutions.
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