For most people tax-saving is more of a burden they are forcefully bearing rather than being a delightful way of saving and investing. It is important to, not view tax-saving as an isolated goal while selecting your investments. The truth is, with a little thought and planning, the investments you make for tax-saving can become an asset for life by adding on to your retirement corpus. A good tax saving investment must be an investment first and a tax saver later.
One must invest in the product that is right for them and weigh the pros and cons of investing in each product and chose the product that is right for us and in line with their Financial goals. Therefore, while planning investments for saving tax, decide how the amount will be split between equity, insurance premiums, home loan and EPF so that you not only reduce your tax but also create wealth for your future needs.
Few of the very important tax saving options are as follows:
1) Equity Linked Saving Schemes (ELSS)
The amount invested in ELSS is eligible for tax deduction u/s 80C. up to a maximum of Rs. 1.5 Lakhs. ELSS funds are pure equity funds and carry a lock in of 3 years. Since ELSS funds are market linked, they are volatile but at the same time, have the potential to deliver highest returns in the long run. Moreover, ELSS funds carry a reasonable lock in period and provide the highest liquidity, when compared to other tax saving investments.
2) Public Provident Fund (PPF)/Employee Provident Fund (EPF)
This is one of the most popular investment options available. The amount invested in PPF is eligible for tax deduction u/s 80C subject to a maxium of Rs. 1.5 Lakh. If one is looking at a fixed return investment, then they may opt for PPF, as PPF is a 100% Debt oriented product which provides safety of capital and guaranteed returns. The current interest rate offered on PPF is 8% p.a. PPF carries a lock in of 15 years, One may extend the term after 15 years by a block of 5 years . The maturity amount of PPF is 100% tax free as of now.
EPF is a retirement benefit scheme that is available to all salaried employees. This amounts to 12% of basic salary + DA, that is deducted by an employer and deposited in the EPF. Both the employer and the employee contribute a maximum of 12% of Basic + DA The current rate of Interest is 8.5% p.a. and the maturity amount is tax free in the hands of the employee.
3) National Pension Scheme (NPS)
NPS is a product where one invests till age 60 years with an option to invest till the age of 70 years. Post retirement, rule says that, we can withdraw approximate 60% of corpus as lumpsum without tax impact and remaining 40% will be converted in the form of Annuity and taxable just like any other income. NPS gives the option to an investor to diversify the portfolio between Equity funds, Government Securities and Fixed income instruments. An investor can invest maximum up to 75% in Equity funds. Investment in NPS offers an additional tax deduction on Rs. 50,000 u/s 80CCD (1B) of the IT Act.
4) Life Insurance/Unit Linked Insurance Plans (ULIPs)
Premiums paid towards term plans and ULIP’s are eligible for tax deduction u/s 80 C, up to a maximum of Rs. 1.5 Lakhs. ULIP’s on the other hand, are an hybrid of Insurance and Investment. They offer a life cover as well as investment in Equity and Debt markets. The returns from ULIP’s are tax free (i.e., the LTCG tax is not applicable at maturity). However, one has to be careful while selecting ULIPs as it could carry higher cost (in the form of Allocation, admin, mortality, FMC etc.) Further, they carry a lock in of at least 5 years, which makes it less liquid as compared to ELSS funds. Even if it underperforms for some reason, we don’t have any option to exit from the same before 5 year completion period.
5) Health Insurance/ Mediclaim
Health insurance offers tax benefits under Section 80D. Individuals can claim deduction under this section for the premium paid for Medical Insurance. An individual can claim a deduction of Rs. 25,000 u/s 80 D for self, spouse and children. An additional deduction for parents is available to the extent of Rs. 25,000 (if they are leass than 60 years of age ) and Rs. 50,000 (if they are over 60 years of age. Although, health insurance premium offers tax benefits, key decision driver must be of covering hospitalisation cost only. Tax benefit is an added advantage.
(By Amar Pandit, CFA, Founder, Happyness Factory)