Did the previous year wreak havoc on your finances? Let’s take a look at tax-saving investments that will help you reboot financially.
Tax-saving investments come with twin advantages. They allow you to multiply your income over the long term and help you save taxes. However, while investing in a tax-saving instrument, it’s crucial to check the taxability of the earned returns. If returns on your investment are taxable, the income you’re targeting to earn will considerably decrease. This is because the taxes will eat into your returns.
Commonly understood tax-saving financial products like the National Savings Certificate (NSC) and the Senior Citizen Savings Scheme (SCSS) are 5-year deposits where the interest gets added to the income and therefore, the entire amount becomes taxable. Thus, even if they help you save tax for the current year, the interest income becomes a tax liability each year till the end of tenure.
This, however, is not applicable for everyone. Even after adding the interest income, if the individual’s total income falls within the exemption limit, his income is tax-exempt. Take the case of senior citizens (aged between 60-80 years) who only earn interest income from such taxable investments of about Rs. 3 lakhs per year. Since the income for such individuals is not taxable till Rs. 3 lakhs, even the interest earned from taxable investments does not become a tax liability for them.
Opting for tax-saving instruments that come with E-E-E status is really beneficial for salaried individuals or those who’re earning income from a business. The principal invested qualifies for deduction under Section 80C of the Income Tax Act, 1961 and the income in all of them is tax exempt under Section 10.
Here are 5 investment vehicles that you should consider for tax-saving purposes.
Equity Linked Saving Schemes (ELSS)
ELSS funds have two distinctive features. Firstly, the investment amount in them qualifies for a tax benefit under Section 80C of the IT Act, up to a limit of Rs. 1.5 lakhs a year. Secondly, the amount invested has a lock-in period of 3 years. ELSS funds don’t have fixed or assured returns as they are dependent upon the performance of the equity markets. These funds come with both dividend and growth options.
However, dividend in an equity Mutual Fund scheme (including ELSS) should not be construed as similar to the dividend received from an equity share. In the latter, the dividend is declared out of profits generated by a company while in a Mutual Fund, it is generated out of the Net Asset Value (NAV). For a Mutual Fund holder, receiving the dividend is merely equal to the redemption of units.
An ELSS is an equity-oriented scheme with more than 65 percent allocation into equities. Although earlier there were nil long-term capital gains on ELSS investments, changes have been proposed in the Budget 2018-19. From 1 April 2018, investors will have to pay 10 percent tax on profits exceeding Rs. 1 lakh made from the sale of shares or equity Mutual Fund units held for over one year.
Additional Reading: How Is ELSS Different From A Mutual Fund
Public Provident Fund (PPF)
With principal and interest having a sovereign guarantee and returns being tax-free, it doesn’t need explaining why it’s one of the most popular savings vehicles. PPF is ideal for investors who do not want volatility in returns akin to equity Mutual Funds. However, for long-term goals, it’s best to take equity exposure, preferably through equity Mutual Funds like ELSS tax saving funds and not be solely dependent on PPF.
PPF is a 15-year scheme, which can be indefinitely extended in a block of 5 years. A PPF account can be opened in a designated post office or bank branch. One can also transfer one’s PPF account from a post office to a bank or vice versa. A person of any age can open a PPF account.
Additional Reading: How To Open A Public Provident Fund Online
Employees’ Provident Fund (EPF)
One of the best ways to do forced savings, it also helps an individual accumulate a tax-free corpus. In this scheme, an employee contributes 12 percent of one’s basic salary each month mandatorily towards his EPF account. An equal share is contributed by his/her employer but only a portion (3.67%) goes into EPF.
The employee’s contributions qualify for tax benefit under Section 80C of the IT Act, 1961, up to a limit of Rs. 1.5 lakh a year. The employer’s share doesn’t though. Both the employee and employer share qualifies for interest as declared by the government each year, which is tax-free in nature.
It is possible, however, to increase one’s own contribution up to 100 percent of basic and DA. In doing so, it becomes a Voluntary Provident Fund (VPF). The VPF is a part of the EPF and the rules remain the same. The interest earned on the EPF/VPF account is tax-exempt as long as the employee continues in employment for five continuous years or more.
Although one may opt-out of VPF by intimating one’s employer, the money contributed towards VPF gets locked-in for a longer tenure.
Additional Reading: Get Extra Benefits From The Employee Provident Fund
Sukanya Samriddhi Yojana (SSY)
Launched as a part of the ‘Beti Bachao Beti Padhao’ campaign, it is a small deposit scheme for the girl child. It’s currently fetching an interest rate of 8.1% and provides income-tax benefits.
A Sukanya Samriddhi Account can be opened any time after the birth of a girl till she turns 10, with a minimum deposit of Rs. 1,000. A maximum of Rs. 1.5 lakhs can be deposited during the ongoing financial year. The account will remain operative for 21 years from the date of its opening or until the marriage of the girl after she turns 18.
Of all the schemes, SSY offers the highest tax-free return with a sovereign guarantee and comes with the exempt-exempt-exempt (EEE) status. The annual deposit (contributions) qualifies for Section 80C benefit and maturity benefits are tax-exempt.
Unit Linked Insurance Plan (ULIP)
A hybrid product that is a combination of protection and saving. It not only provides Life Insurance but also helps channel one’s savings into various market-linked assets for meeting long-term goals.
In most ULIPS there are 5-9 fund options with varying asset allocations between equity and debt. The lock-in period is 5 years for a ULIP. Also, the fund value on exiting this scheme or on maturity is tax-free.
Tax-free investments ensure that the returns on your investments do not diminish owing to taxes. Looking to build your financial portfolio? Why not invest in Mutual Funds only on BankBazaar?