Let me share with you a small personal tryst with investment in Equity-linked Savings Scheme (ELSS) for tax-saving purposes. Since I track stock markets closely, my preference is usually tilted towards direct equity investments rather than going through the mutual fund route.
However, in order to stifle my taxable income, I had to invest Rs. 30,000 in an ELSS scheme way back in Feb-2008. The Indian markets were in the midst of a severe bear phase then, with Sensex hovering around 16000 levels.
The time ticked by and it was Feb-2009 on the calendar. It was time to invest another Rs. 30,000 to save on taxes. The Sensex was quoting at paltry 8000 levels – on hindsight, it turned out to be the trough of the bear market. Needless to say, there was panic written all over the screen.
Fortunately, for me, this period turned out to be a golden opportunity to average my previous lump-sump investment which went in at higher levels of market. The average value of my total Rs. 60,000 investments now stood correlated with Sensex 12000 levels.
But, you might not be lucky enough to get such averaging opportunities just around the end of every financial year. Your lump-sump investments may not necessarily stand you in sweet spot if your investments are made arbitrarily during the year-end. They need to be planned well in advance through out the year.
- 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 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 deduction of upto 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 to individuals:
1) Public Provident Fund
Public Provident Fund, or PPF, 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 absolutely 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 upto maximum of Rs.70,000 in a financial.
Unit-linked Insurance Plans (ULIPs), which are eligible for Section 80C tax rebate, areinvestment 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.
Recently, insurance regulator IRDA had initiated a few corrective measures by hiking the threshold limit for ULIPs from 3 years to 5 years of lock-in period and mandated a minimum guarantee for such plans. Now, the policyholders can also opt for pre-mature exit without any penalty.
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 introduction of the Direct Tax Code (DTC) starting from April 1, 2012. 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
You might be thinking how come bank fixed deposits are included in tax-saving schemes? 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. Such deposits should necessarily be in the RBI mentioned list of Scheduled Banks.
Most of such tax-saving fixed deposit avenues are of fixed tenure and do not allow pre-mature withdrawal facility. Further, such term deposits can not 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
Salaried individuals are compulsorily required to contribute 12% of the sum of basic pay and dearness allowance to Employee’s Provident Fund (EPF). This sum is deducted by the employers from the monthly payroll of employees as a social security scheme akin to a forced-saving towards retirement planning.
EPF brings with it key benefits as a fixed-income instrument providing tax benefits under Section 80C at the time of investment. Even the returns from EPF are tax free on maturity. The employer also has to make a matching contribution to the EPF.
6) National Savings Certificate
The 8% returns from National Savings Certificate (NSC) are not only assured and tax exempt under Section 80C, but also government guaranteed. Unlike PPF, NSCs have no upper limit on the maximum amount that can be invested in a fiscal year.
This small saving scheme offers tax-free initial deposit for 6 years. However, interest in NSC is taxable. But, the interest for the first 5 years is eligible for a deduction as NSC is a cumulative scheme – where interest is reinvested and is qualified under fresh deduction in NSC.
7) Infrastructure Bonds
In Union Budget 2010, Finance Minister Pranab Mukherjee proposed the deduction for funds flowing in long-term infrastructure bonds in India upto 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 highest tax bracket, such investments can bring in savings of upto around Rs. 6000.
8) Insurance, 9) Health Premiums & 10) 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 paid towards life insurance premium for yourself or your family is eligible for 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.
Are you still waiting for the last week of March to invest your taxable income?