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Best Tax saving investment schemes for those who are looking for safe, assured and fixed returns on their investments meant for saving tax have three popular options to look at. The 5-year tax-saving bank fixed deposits, post office time deposits and National Savings Certificates (NSC) are three such investment alternatives that come with tax benefits under section 80C of the Income Tax Act and also provide a fixed return. When it comes to investing money in a safe place, bank fixed deposits remain the first choice for several investors, especially senior citizens.
The following are the top 10 tax-saving instruments on eight key parameters returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income. Each parameter was given equal weightage and the composite scores determined their place in the ranking.
If you are a taxpayer and want to take tax benefit on your investment in bank FD, the 5-year tax-saving FD scheme of banks could suit you. The investment made in the bank FD tax saver qualifies for tax benefit under section 80C and will, therefore, help you save tax.
The interest earned is fully taxable in the hands of the investor in the year of receipt. For someone paying 31.2 per cent tax (highest tax slab), the post-tax return on a 7 per cent FD comes to about 4.82 per cent. Even though the implicit guarantee exists on bank FD, the explicit guarantee is only up to Rs 1 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act. The insurance cover is on the principal and interest earned and is available on deposits in each branch of a bank.
Changes in investment and tax rules have just made the NPS more attractive. Firstly, the entire 60% of the corpus that can be withdrawn at the time of retirement will now be tax free. Secondly, investors can now allocate up to 75% to equities in the active choice option of the NPS. You can also remain invested till the age of 70 and stagger your withdrawals. NPS can help save tax under three different sections. Contributions of up to ₹1.5 lakh can be claimed as deduction under Sec 80C. An additional deduction of up to ₹50,000 is available under Sec 80CCD(1b). If your employer puts up to 10% of your basic salary in the NPS, that amount will not be taxable. 60% of the corpus that can be withdrawn at the time of retirement will now be tax free.
The Senior Citizens’ Savings Scheme (SCSS) was the best tax-saving option for those above 60, and last year’s Budget made it more attractive by offering seniors an additional ₹50,000 exemption on interest income. This means the overall tax exemption for those above 60 is now ₹3.5 lakh and for above 80 is ₹5.5 lakh.
The 8.7% offered by SCSS is the highest among all small savings schemes. The tenure of SCSS investment is five years, which is extendable by another three years. However, there is a ₹15 lakh overall investment limit. Also, the scheme is open mostly to investors above 60. If the investor has opted for voluntary retirement and not taken up another job, the minimum age is relaxed to 58. Senior citizens get an additional ₹50,000 tax exemption for interest income.
For taxpayers with a daughter below 10 years, the Sukanya Samriddhi Yojana is a good way to save. The interest rate will be 8.5% till March and could change in April.
The Sukanya scheme offers a higher rate than the PPF. Just like the PPF, the interest earned is tax free and there is an annual cap of ₹1.5 lakh on the investment. Accounts can be opened in any post office or designated banks with a minimum investment of ₹1,000. A parent can open an account for a maximum of two daughters, but the combined investment in the two accounts cannot exceed ₹1.5 lakh in a year. The best part is that the account is opened in the name of the child and the maturity proceeds have to be used for her education and marriage.
Traditional policies are not able to offer the insurance cover that a person actually needs. Experts say one should have a cover of at least 6-8 times his annual income. So, someone earning ₹50,000-60,000 a month at the age of 30 should have a life insurance cover of roughly ₹40-50 lakh. An endowment plan offering a cover of ₹40-50 lakh will cost the buyer almost ₹4-5 lakh per year. This is nearly 60-70% of his total income. However, a term cover for ₹1 crore will cost him just ₹7,000-8,000 a year, which will be only 1% of his income. Keep this math in mind when you go shopping for a tax-saving instrument this year.
Unit Linked Insurance Plans are basically market-linked products. Under the same, the insured gets the benefits of both insurance protection and investment as well. The financial investment that you made under this plan is eligible for a tax deduction and let your money grow successfully.
Even before the tax on capital gains was announced, Ulips had a distinct tax advantage over mutual funds. Ulips not only offer equity funds but also debt and liquid fund options to investors. Switching from equity to debt or vice versa does not have any tax implications. Short-term gains from debt funds and income from fixed deposits is taxed at the marginal rate while long-term capital gains from debt funds are taxed at 20% after indexation. But income from Ulips is tax free. The new Ulips launched by insurance companies are low on costs and compete with direct
The post office time deposit (TD) in a post office is almost similar to a bank fixed deposit but one can deposit only for 1 year, 2 year, 3 year and 5 years. The deposit made for 5-year duration qualifies for the Section 80C tax benefit.
Currently, (January 1 to March 31, 2020) the interest rate is 7.7 per cent per annum, payable annually but compounded quarterly. The interest earned is fully taxable and to be added to one’s ‘Income from other sources’ as in the case of bank FD.
The tenure of NSC is also 5 years but unlike bank FD and PO Time Deposit, there is no option to get regular interest payout, not even annual payments. The amount invested in NSC can be had only on maturity.
The interest is taxable in NSC but the unique thing about NSC is that the interest accruing annually during the first 4 years is deemed to be re-invested and thus qualifies for tax benefit under section 80C.
Currently, NSC interest rate is 7.9 per cent per annum compounded annually but paid on maturity. Illustratively, Rs 100 grows to Rs 146.25 after 5 years.
ELSS funds are the best way to save tax. Though the SIP window has closed for taxpayers who would have had to show proof of Sec 80C tax-saving investments by now, experts say one can still put money in 2-3 tranches into ELSS funds before the 31 March deadline. It is important to note that not all ELSS funds carry the same risks. Some allocate more to small- and mid-cap stocks, while others stick with stable large-cap stocks. Choose the one that best suits your risk appetite. ELSS funds have a lock-in of three years, the shortest among all tax-saving options. ELSS is the best way to save tax for young taxpayers. They should stagger their investments with monthly SIPs.
PPF rates were hiked in October 2018 after a sustained rise in bond yields. Though bond yields subsequently came down in the third quarter of 2018-19, PPF rates have remained unchanged. Advisers say PPF remains a good bet because the interest is tax free, giving the small savings scheme a distinct advantage over fixed deposits. The interest from FDs is fully taxable, which brings down returns to just 5% in the highest tax bracket. Advisers also warn against bingeing on fixed income instruments.
PPF scores high on safety, flexibility and ease of investment. An account can be opened in a post office or designated bank branches. Opt for a bank that allows online access to the account.
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