Every
Indian with a taxable annual income beyond Rs 5 lakhs is legally obligated to
pay taxes.
The
government does allow certain deductions up to Rs 1.50 lakhs that can be
claimed via investing under section 80c of the Income Tax act.
This
deduction can be claimed either via one source of investment or several.
Every investment option has its own pros and cons as discussed below.
Tax Saving/ELSS
Mutual Funds
Tax saving/elss mutual funds allow you an
exemption of up to 1,50,000 in your taxes under section 80c of the income tax
act.
Tax saving funds have a lock in period of 3
years.
Elss funds need to invest a minimum of 80%
of its overall portfolio into equities.
In case of sip plans, you have to keep in
mind that each sip instalment completes 3 years in case you wish to redeem.
Additional reading: Click Here to read about mutual fund mistakes you should avoid making
Are elss mutual funds also taxed?
Yes, elss mutual funds better known as tax
saving mutual funds are also taxed as any other equity mutual fund.
They can only be charged LTCG since they
have a lock in period of 3 years so therefore by default the holding period is
more than a year.
Elss mutual funds allow you tax exemptions
but the gains on them is not tax free.
National Pension System (NPS)
Under section 80c of the Income Tax Act,
deductions can be claimed up to Rs 1,50,000.
With NPS, an additional 50,000 can be
claimed.
The primary of the NPS as the name suggests
is to allow have a source of pension after retirement.
Anyone between the ages of 18-60 can open a
NPS account.
Partial withdrawals are only permitted
after 10 years and that too under special circumstances.
The highest exposure to equity is capped at
50% and gains after maturity are taxable.
5 year Fixed Deposits
Tax saving fixed deposits are like your regular
fixed deposits except for they come with a lock in period of 5 years and be
claimed for tax deductions.
Regular tax saving fixed deposits cannot be
claimed for tax deductions.
The interest rate will vary from bank to
bank.
KYC is required if you open your FD with a
new bank, not required if you open your FD with your current bank.
Unlike regular fixed deposits, you cannot
withdraw before the expiry of the lock in period by paying a fine with a 5 year
fixed deposit.
Public Provident Fund
Public Provident Fund better known as PPF
can be opened with either a post office or a bank.
It has a lock in period of 15 years.
Withdrawals up to a certain amount is
permitted only after the completion of the 5th year.
Even non salaried people can open a PPF
account.
The rate of interest keeps changing
periodically and is decided by the government.
Sukanya Samriddhi Yojana
This is a government run scheme introduced
for the betterment of the girl child.
Parents/Guardians can invest for their girl
child who is below 10 years.
The interest rate is fixed by the government
on a quarterly basis.
It can be opened with either a post office
or a bank.
Interest in only paid up to the period of
the scheme (21 years) and not beyond.
A partial withdrawal of up to 50% of the
total amount as on the previous financial year is allowed after she turns 18.
Both withdrawals and gains are tax free.
Ulips
Ulip’s are a mix of insurance policy along
with exposure to either debt or equity.
It provides the best of neither though.
They have high costs and low transparency
as compared to other avenues of investment.
Ulip’s have a lock in period of 5 years.
As much as possible it is better to avoid
ULIPs since it fails to provide value either with the insurance part or the
investing part.
It is advisable to never mix investments
with insurance, keep them separate.
National Savings Certificate
The National Savings Certificate is again a
savings scheme backed by the government.
It can be opened with any post office.
It comes with a lock in period of 5 years.
There is no maximum limit even though you
can claim deductions only up to 1,50,000.
Senior Citizens Savings Scheme
This again is backed by the government.
As the name itself mentions, this scheme is
only available for senior citizens.
This can be considered by the most
productive scheme for senior citizens considering the comparative schemes.
The interest is paid on a quarterly basis.
Where
should you invest?
If you are a senior citizen with a requirement
for quarterly income then Senior Citizens Savings scheme is your best bet.
For everyone else, look no further beyond
elss funds since it has the lowest lock in period along with potential for
highest returns comparatively.
Modern investing is not about returns, it’s
about inflation beating returns because if your investments are not beating
inflation with a considerable margin then basically your capital is losing
value overtime.
Elss funds are subject to market risks but
the longer you stay invested, the less volatile your elss investments are
likely to be.
With every scheme (besides elss funds) the
lock in period is 5 years and more so you anyway have to wait for 5 years or
more.
If you are salaried employee in a company
that qualifies for EPF, you can add elss funds to it.
Same is the case for someone with a
daughter that can avail of Sukanya Samruddhi Yojana, add elss funds to balance
out debt and equity.
ULIP’s have a high transparency cost with
no meaningful purpose and therefore should be avoided at all costs.
A 5 year tax saving fixed deposit can hardly
beat inflation, cannot be withdrawn prematurely by paying a fine and has a very
deterrent tax treatment since the interest gained is added to income and taxed
according to the income slab of the individual which makes it the worse possible
option for someone who falls under the highest tax bracket of 30%.
Therefore along with ULIP’s, it should be
avoided at all costs.
Your most suitable option along with an elss
fund are:
- Senior Citizens Scheme
- Sukanya Samruddhi Yojana &
- Employee Provident Fund
The above options are filtered keeping in
mind inflation beating returns, purpose, lock- in period and their tax
treatment.
Instrument | Lock in period |
Elss funds | 3 years |
Public Provident Fund | 15 years |
National Savings Certificate | 6 years |
Bank Fixed Deposits | 5 years |
Besides the investment options, there are
various other non-investment sources via which too you can claim deductions
such as:
- Premium paid towards various insurance schemes.
- Principal paid on home loan, stamp duty & registration fees.
- Tuition fee paid for up to two children for a full time course in any educational institute located in India.
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