We earn. We spend. We save. And then, at the end of the fiscal year, we compute our income tax. Many of us hurriedly invest in a bid to reduce our tax liabilities.
The government has capped the tax reduction at Rs 1 lakh. However, it is worth looking at these instruments as some of them offer good returns.
Here’s a look at ten such tax-saving investment options:
1) Public Provident Fund: This is one of the most common investment options used to save tax. PPF is a fund operated by the central government, where you can voluntarily invest. It can be opened by anyone for a paltry sum of Rs 100. The government fixes the annual compounded return every year. As of April 2013, the interest rate was fixed at 8.7%.
The best feature about PPF investment is it can reduce your taxable income by up to Rs 1,00,000 in a financial year under Section 80C of the Income Tax Act. It is also one of the safest options and offers reinvestment benefits. However, you will not be able to withdraw funds from the account for 15 years. Interest payments are also tax-free.
2) Equity-linked saving schemes (ELSS): These are tax-saving mutual funds that invest in equities, introduced by the government to increase retail participation in the stock markets. The Rajiv Gandhi Equity Saving Scheme is one such scheme for new investors. Any increase in your investment value through the ELSS in the future is also tax-free. Also, of all the investment options mentioned in the Income Tax Act, this has the lowest lock-in period of three years.
3) Unit-Linked Insurance Plans (Ulips): This is an option that provides the benefits of both insurance and investment. For Ulips, you pay a premium for a fixed number of years. This is then invested in various funds depending on your requirements. These could be equity-based, providing you with higher returns. However, Ulips have a long lock-in period like the PPF. Also, once you purchase a plan, you will have to keep paying the premium for the fixed period.
4) Employee Provident Fund (EPF): An EPF, also called a provident fund, is very similar to the PPF. The key difference is that half of your EPF is paid by your employer. The law mandates that 12% of your salary be paid to the fund. The government fixes the annual return every year. It currently stands at 8.75%. While the PPF money can be used after 15 years, the EPF cannot be touched until you retire.
5) Senior citizen’s saving scheme: These are savings schemes offered only for individuals over 60 years of age. It returns are also fixed by the government. Currently, it stands at 9.2%. However, the quarterly interests received are liable for tax. Also, the RBI has capped the maximum investment in this fund at Rs 15 lakh.
6) National Savings Certificate: This is a tax-saving bond floated by India Post. Its interest rate is also fixed every year. Currently, this stands at 8.5% for the 5-year scheme and 8.8% for the 10-year bond. However, interest payments are taxed.
7) New Pension Scheme: This is a low-cost investment option that offers tax rebates under Section 80C mandatory for government employees, but voluntary for others. The minimum annual contribution is Rs 6,000. A portion of this can also be contributed by your employer. However, the funds can usually be withdrawn only after retirement.
8) Bank deposits: Long-term fixed deposits with government-owned banks are eligible for tax deduction under Section 80 of the IT Act. However, interest earned is not exempted from tax. Interest income up to Rs 10,000 from savings bank accounts is also eligible for tax reduction.
9) Insurance: Life insurance policy premiums too offer tax benefits under Section 80C by reducing your overall taxable income. Medical insurance premiums up to Rs 15,000 are also eligible. If one of the insured is a senior citizen, this limit goes up to Rs 20,000.
10) Tax-saving bonds: Fixed-income instruments like bonds are one of the safest investments. However, they have lower returns. But, there are many corporate bonds that are eligible for tax rebates above the Rs 1 lakh limit.
To learn more about such investment options visit www.kotaksecurities.com.