A look at investments that can help you save tax

ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities. Investments in ULIPs attract tax benefits under Section 80C. The returns and the lock-in period depend on the plan chosen.

The best method to reach financial independence is through maximum savings and the least amount of tax payout from your income. The maddening chaos that ensues every year in February for people with regard to deciding upon tax saving instruments and investment products can be reduced with a little bit of research. Remember, investments only for tax saving purposes are not advisable.

Let’s look at some investment options in the order of their risk factors, tax savings and returns.

Bank Fixed Deposits

In a fixed deposit saving scheme a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest (currently between 8% and 10% depending on banks). When you want to invest your hard earned money for a longer period of time and get a regular income, a Fixed Deposit Scheme is ideal. It is safe, liquid and fetches high returns.

Public Provident Fund (PPF)

Given its safety (its government backed) with relatively high returns (currently 8 % p. a. compounded annually) and tax exemptions on its interest earnings and the final corpus; its effective post-tax return currently works out to above 11.57% (for someone paying 30.9% tax). Given its Rs. 500 per year minimum investment stipulation, with one contribution allowed every month, you can even invest small amounts for your long-term.  However, the money is locked in for 15 years.

National Savings Certificate (NSC)

The National Savings Certificate – popularly referred to by its acronym NSC – is a post-office savings scheme. Backed by the government, it is one of the safest investment options. The minimum amount is Rs 100, with no upper limit on investment. NSC is for a much shorter duration of 6 years from the date of investment. You get 8% p. a. compounded half-yearly (twice a year). However, NSCs are taxable under the head ‘income from other sources’.

Infrastructure Bonds

Through Infrastructure Bonds India or Tax-Saving Bonds an investor can save on taxes as provided under Section 80 C of the Income Tax Act, 1961. Though the interest is taxable, you can claim exemption from tax to the tune of Rs. 15,000 under Section 80 C. The maximum investment is Rs. 1 L. The lock-in period is of 3 years and the returns work out to 5% – 6% or 8.7% – 11.71% if the tax break is taken into account. This interest is taxable.

Life Insurance Schemes

When buying insurance, keep one thing in mind, look to maximize your cover, not returns. The maximum investment depends on the terms of the policy. The total premium paid has to be within the Rs 70,000 limit of rebate under Section 80C. The lock-in period and the returns depend on the scheme and its tenure.

Equity Linked Savings Scheme (ELSS)

ELSS as the name clearly suggests is a savings scheme linked to equity markets. The minimum amount of Rs. 5000 is locked in for three years. Although, ELSS gains are linked to the market performance, it has been seen that they yield healthy returns. From March 31^st, 2006 the investment limit in ELSS has been increased to Rs.1, 00,000/- and this entire investment is eligible for deduction under sec 80C of Income tax Act, 1961.

Unit Linked Insurance Plans (ULIPS)

ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities. Investments in ULIPs attract tax benefits under Section 80C. The returns and the lock-in period depend on the plan chosen.

Investment and Tax saving Instrument	Interest	Term (if applicable)	Features
Bank Fixed Deposits	8% – 10% (depending on banks)	15 days to 5 years and above	Investments Minimum – Rs. 100 (depending on banks). Maximum – Unlimited (depending on banks) Tax benefits FDs with a 5 year lock in period are eligible for tax benefits under Section 80 C Other Benefits Safe, as deposits are insured under the Deposit Insurance & Credit Guarantee Scheme of India. Possible to get loans up to 75- 90% of the deposit amount from banks against fixed deposit receipts.
Public Provident Fund (PPF)	8%	15 years	Investments Minimum – Rs. 500/- Maximum – Rs. 70,000/- in a financial year Tax benefits Rebate on investment U/S 80C of I.T. Act 1961. Interest income fully exempted from income tax Balance held in the P.P.F. account is completely free from wealth Tax.
National Savings Certificate (NSC)	8% (compounded half yearly	—	Investments Minimum investment Rs. 500/- No maximum limit. Issued in denominations of Rs.100, Rs.500, Rs.1, 000, Rs.5, 000 and Rs.10, 000. Tax benefits Qualifies for tax rebate or first 5 years under section 80 C of Income Tax Act. Other benefits Certificate can be pledged as security against a loan to banks/ Govt. Institutions. Facility of encashment of certificates through banks.
Infrastructure Bonds	5.5% to 5.6%	3 Years	Investments Minimum investment Rs. 30, 000/- Maximum limit – Rs. 1, 00, 000. Tax benefits Investments in infrastructure bonds from various financial institutions qualify for a tax rebate under Section 80 C of the Income Tax Act.
Life Insurance Schemes	Depending on scheme	Depending on scheme	Tax benefits Investments in insurance schemes earn rebates under 80C.
Equity Linked Savings Scheme (ELSS)	Depending on the scheme	3 years	Investments Minimum investment Rs. 5, 000/- Maximum limit – Rs. 1, 00, 000. Tax benefits Investments in ELSS earn are eligible for deduction under 80C.
Unit Linked Insurance Plans (ULIPS)	Depending on the scheme	Depending on the scheme	Investments Depending on scheme. Tax benefits Investments qualify under Section 80C of the Income Tax Act. Maturity proceeds from ULIPs are tax free.