Best Tax Saving Instruments
As the tax season draws to a close, choosing and investing in the right scheme is key. Tax saving options can get confusing, so to aid your decision on which option is better, we have rated the different options on a variety of parameters.
The investment options we have rated include the following, but different people have diverse investment needs, so you may need to analyse what is your personal requirement before selecting the scheme.
- Equity Linked Savings Scheme (ELSS) Funds
- Unit Linked Insurance Plan (ULIP)
- National Pension Scheme (NPS)
- Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- Voluntary Provident Fund (VPF)
- SukanyaSamriddhi Scheme
- Senior citizen saving scheme
- Bank Tax Saver Fixed Deposits
- Pension Plans
- Life Insurance Policies
- Home loan payment
- National Savings Certificate (NSC)
- Infrastructure bonds
- Children’s Tuition Fees reimbursement
- Rajiv Gandhi Equity Savings Scheme
For most of the above options, savings is limited to an overall limit of Rs. 1.5 Lakh under section 80 C, however some schemes offer extra benefits as well. For instance, there is an additional Rs 50,000 deduction for NPS and home loans also offer extra deductions for interest payment.
What must be noted is that while in some of the above schemes the entire proceeds received after investment may be taxable, for others, only a portion is taxable. So it is essential to consider the tax implications both at the time of investment and the time of maturity of the scheme.
For convenience, we have created a table highlighting the tax savings at both stages from each of the above schemes, so that the tax payer can have a glance at all of them before deciding on the preferred mode of tax saving.
|Tax Saving option||Scheme Features||Max allowed for tax deduction||Lock in period||Rate of return||Tax implications||exit option||Special Note|
|At time of investment||At maturity|
|ELSS||These are pure equity funds. Minimum contribution of Rs 500||Within the overall Rs. 1.5 lakh u/s 80 C||3 years||No guaranteed returns. Based on equity market
Last five year average return % = 13.5%
|Payments to the funds are tax deductableupto Rs. 1.5 Lakh under Sec 80 C||All returns on redemption, after lock-in, are tax free.
Dividends are also tax free
|Free to exit after lock in of 3 years|
|ULIP||These are hybrid products that mix life insurance and equity funds. The premium is fixed for the tenure of the policy.||Within the overall Rs. 1.5 lakh u/s 80 C||5 years||No guaranteed returns. Based on equity market
Last five years avg return % = 8.5%-9.7%
|Premium paid is eligible for deduction subject to sum assured being 10 times premium paid||The entire payout after maturity or death benefits will be tax free in the hands of the receiver (Sec 10 10D) if premium is less than 10%
If premium is more than specified limit, the entire proceeds will be taxed
|Exit is possible after paying minimum 5 years’ premiums.||Loans are available against the policy. The maximum loan amount that can be approved by insurers shall not exceed 40% of the net asset value|
|NPS||NPS is a retirement savings system. Subscribers can invest in three asset classes’ funds; equties, corporate bonds and government securities funds.
Min Rs 6000 annual contribution for Tier I and min balance of Rs 2000 for Tier II
|10% of Salary /gross income under section 80CCD (1) of Income Tax Act, 1961 within Rs.1.5 Lacs limit under section 80C.
Additional investment of Rs.50,000 will be eligible for tax deduction under section 80CCD
|Tier I – until the age of 60
Tier II – no lock in
|There are no guaranteed returns in the NPS. Based on equity market||Payments to the scheme are tax deductableupto Rs. 1.5 Lakh||
Income from the annuity is taxed at normal rates
The full money withdrawn as lumpsum is taxed as capital gains
|Tier-I: If you retire <60, can withdraw 20 % of your savings as a lump sum and use the remaining 80% to purchase the annuity. If you retire at 60 years, you will be required to invest minimum 40 % of accumulated savings towards life annuity. The remaining amount can be withdrawn in lumpsum or spread over a period between the age of 60 and 70. Tier -II: In this voluntary account, you will be free to withdraw your savings from this account as per your wish.|
|Pension Plans||Deduction is available to an Individual for any amount paid into any annuity plan offered by both mutual funds and insurance companies.
Depending on their risk profiles, investors can choose different combinations of equity and debt, although portfolios are generally debt oriented
|Maximum of Rs 1.5 Lakh u/s 80 CCC within the overall Rs. 1.5 lakh limit u/s 80 C||Generally 5 years||Guaranteed maturity benefits and “on-zero” returns on premiums. Balance is based on markets.||Payments to the scheme are tax deductableupto Rs. 1.5 Lakh||1/3 lumpsum is tax free
Annuity is taxable at normal rates
|Can withdraw 1/3rd of the accumulated fund tax-free on maturity and buy an annuity with the rest of the money
No partial withdrawal is allowed during the accumulation phase
|PPF||Public Provident Fund is a statutory scheme of the central government to provide income security to the unorganized sector workers and self-employed persons
Minimum: Rs 500 per annum
|Within the overall Rs. 1.5 lakh u/s 80 C||15 years||8.7% compounded annually||Payments to the scheme are tax deductableupto Rs. 1.5 Lakh||The entire invested amount along with the interest earned is tax-free in the hands of the investor||Partial withdrawal is permissible from 7th financial year of opening account; maximum of 1 withdrawal each year||Loan can be availed by the PPF account holder from the third year up to a maximum of 25% of the account balance at the end of the first financial year. However, the loan has to be repaid with interest at 1% interest per annum within 36 months.|
|EPF & VPF||12% of salary is contributed with equal contribution from employer in EPF
VPF allows any additional contribution, but employers will not match this
|Within the overall Rs. 1.5 lakh u/s 80 C. VPF eligible for Sec 80 C tax benefit||Retirement or Resignation||8.7% compounded annually||Payments to the scheme are tax deductableupto Rs. 1.5 Lakh||The entire invested amount along with the interest earned is tax-free in the hands of the investor
Withdrawal within 5 years makes amount taxable
|Can withdraw partially based on circumstances; amounts will vary||It is possible to get a loan against the PF account for major events like marriage, house contruction.|
|SukanyaSamridhhi Scheme||SukanyaSamriddhi Account Scheme is a small deposit scheme for girl child. It is open for parents of daughters below 10 yrs, deposits have to be made for 14 years.
Min amount is Rs 1000 per annum
|Within the overall Rs. 1.5 lakh u/s 80 C||Until daughter turns 21||9.2% compounded annually||Payments to the scheme are tax deductableupto Rs. 1.5 Lakh||The entire invested amount along with the interest earned is tax-free|| 50% of the amount can be withdrawn after girl turns 18.
Full withdrawal allowed for marriage of daughter
|Senior Citizen’s Savings Scheme||Small savings scheme open to investors over 60 years. Interest is paid out quarterly and minimum amount is Rs 1000||Rs.15 Lakh||5 years||9.3% compounded quarterly||Payments to the scheme are tax deductableupto limit specified||
Interest is taxable if over Rs 10,000
|Account can be closed after completion of 1 year.
If closed before 2 years, 1.5% of amount deposited is deducted.
If closed after 2 years, 1% of deposit amount is deducted
|Bank FD||Fixed Deposit with various public and private sector banks where tax benefits are available on investment||Within the overall Rs. 1.5 lakh u/s 80 C||5 years||Varies depending on bank||Payments to the scheme are tax deductableupto Rs. 1.5 Lakh||The interest earned from tax saver fixed deposits is taxable at normal rates and TDS will be deducted||Premature withdrawal is not available.|
|Insurance Policies||Deduction is available for premiums of life insurance policies.For policies purchased after April 2012, only premiums which are less than 10% of sum assured are allowed, while older policies’ benefits will continue||Within the overall Rs. 1.5 lakh u/s 80 C||varies||sum assured is guaranteed||Premium payments to the scheme are tax deductableupto Rs. 1.5 Lakh||
Returns on insurance products are tax free
Surrendered policies are taxed at normal rates
|The proceeds of the discontinued policy for refund shall mean the fund value upto discontinuance plus interest computed at a rate of 3.5% per annum.|
|NSC Certificates||This is a small savings scheme for individuals.
Minimum: Rs 100 per annum
|Within the overall Rs. 1.5 lakh u/s 80 C||5/10 yrs||8.5% compounded half yearly for 5 yrs
8.8% compounded half yearly for 10 yrs
|Payments to the scheme are tax deductableupto Rs. 1.5 Lakh||Interest is taxable on receipt, although accrued interest will qualify for deduction u/s 80 C||No premature withdrawal except if holder dies.
No interest is paid if encashed within 1 year and dscounted interest is paid if done after a year.
|Certificates can be kept as collateral security to get loan from banks|
|Infrastructure Bonds||Tax-free bonds to finance infrastructure projects. They are rated by a credit rating agency, can be electronically held and are traded on the BSE or NSE after issue||Can invest max of Rs 10 Lakh in these bonds||10/15/20 years||Pegged at G Sec rate
Currently around 7.5%
|NA||Income from these bonds are completely tax free at maturity
If held for less than lock in period, capital gains tax will apply
|Can be traded in the secondary market|
|Rajiv Gandhi Equity Savings Scheme||New investors with annual income less than Rs 12 lakh per year. The equities eligible are in the BSE 100 and the CNX 100 indices, PSUs in the Maharatna, Miniratna, and Navaratna categories, listed mutual funds that are invested entirely in the above equities, and IPOs of large PSUs.||50% deduction of the amount invested during the year, upto a maximum investment of Rs. 50,000 per financial year, from taxable income U/S 80 CCG||3 years||No guaranteed returns. Based on equity market||Payments to the scheme are tax deductableupto Rs. 50,000||All returns on redemption, after lock-in, are tax free.
Dividends are also tax free
|Stocks can be traded after the first year.
Scheme can only be availed for three consequtive years where income does not cross specified limit
|Tuition fees upto two children||Deduction under this section is available for tuition fees paid on two children’s education
However, donation payment is excluded
|Within the overall Rs. 1.5 lakh u/s 80 C||NA||NA||Payments to the scheme are tax deductableupto Rs. 1.5 Lakh||NA||NA|
|Home Loans||The principal portion of the home loan EMI qualifies for deduction under Section 80C.
The interest on home loan qualifies with a maximum deduction of Rs 2 lakh as interest payment on a self-occupied property’s home loan and unlimited for rental property
Sec 80EE also allows further deduction for first time buyers’ interest payment upto maximum of Rs1,00,000
|Principal -Within the overall Rs. 1.5 lakh u/s 80 C
Interest – Rs 2 Lakh U/s 24
Rs 1 lakh additional deduction u/s 80 EE for interest payment
total savings = 1,50,000u/s 80 C + 2,00,000 + 1,00,000u/s 80EE
|NA||If property is sold within 5 years, entire amount claimed as deduction can be taxed.||No principal payment deduction for under-construction homes, and interest deduction is allowed for 5 yrs after construction.
Sec 80 EE is only available for 2013-14 and 2014-15( value of house < Rs 40 Lakh, loan should be < Rs 25 Lakh) For non self-occupied property, unlimited interest payments are tax deductable, however no principal repayment deductions are allowed
SOME ADDITIONAL DETAILS
The following table highlights the best ELSS funds available today. This is by far the best tax saving instrument since it has the shortest lock in period of three years and research has consistently demonstrated that equity offers the best returns over the long term. The table shows both three and five year returns of the best funds.
|Performance of ELSS Funds|
|Fund||Expense Ratio %||5-Year Return (%)||Net Assets (Cr)|
|Axis Long Term Equity Fund||2.51||18.24||6,867|
|Reliance Tax Saver Fund||2.37||14.59||4,605|
|BNP Paribas Long Term Equity Fund||2.82||14.55||422|
|Religare Invesco Tax Plan||2.78||13.24||258|
|Franklin India Taxshield Fund||2.39||13.16||1,868|
|Birla Sun Life Tax Plan||2.96||13.05||299|
|Tata India Tax Savings Fund||2.73||12.45||246|
|ICICI Prudential Long Term Equity Fund (Tax Saving)||2.41||12.41||2,885|
|IDFC Tax Advantage (ELSS) Fund||2.88||12.1||375|
|Birla Sun Life Tax Relief 96||2.38||11.83||2,010|
|Fund||Expense Ratio %||3-Year Return %||Net Assets (Cr)|
|Axis Long Term Equity Fund||2.51||24.21||6,867|
|Birla Sun Life Tax Relief 96||2.38||18.95||2,010|
|Reliance Tax Saver Fund||2.37||18.20||4,605|
|Birla Sun Life Tax Plan||2.96||18.08||299|
|Religare Invesco Tax Plan||2.78||17.31||258|
|Tata India Tax Savings Fund||2.73||16.92||246|
|Franklin India Taxshield Fund||2.39||16.12||1,868|
|BNP Paribas Long Term Equity Fund||2.82||16.08||422|
|ICICI Prudential Long Term Equity Fund (Tax Saving)||2.41||15.90||2,885|
|DSP BlackRock Tax Saver Fund||2.5||15.57||1,112|
Life Insurance is very confusing given the variety of schemes available. However, they are all variants of the following schemes:
|Type of Insurance||Features|
|Term assurance||Term insurance policy covers only the risk of dying. If one dies, the nominees get the sum assured, otherwise no one gets any pay-out|
|Endowment||These are plans that provide insurance and a small return on investment whether one survives the policy or not.|
|Without-profit endowment plans||Here one gets the sum assured plus a one-time loyalty bonus|
|With-profit endowment plans||Here, one gets an additional profit along with sum assured. If this is guaranteed, it’s called guaranteed additions, otherwise non-guaranteed amounts are called bonuses.|
|Money back||These are endowment plans with a difference; the pay-outs are staggered through the policy term. However, on death, the entire sum assured is paid irrespective of earlier pay-outs|
|Unit Linked Investment Policy(ULIP)||While a part of the monthly premium pay-out goes towards the insurance cover, the remaining money is invested in different types of funds that invest in debt and equity instruments similar to a mutual fund|
|Pension Policies||This is a retirement planning investment scheme where the sum assured or the monthly annuity after retirement depends on the amount of capital invested, the timeframe, and the age at which one wishes to retire.|
|Unit Linked Insurance Plans are a blend of life insurance and investment. There is no database or ranking of ULIP funds since each insurance company claims its own product is unique. The following is a snapshot of some popular ULIP funds’ performance.
|Aggressive allocation funds –|
|Fund||5 Yr return (%)||3 Yr return (%)|
|ICICI Prudential Life – Group Growth Fund||9.3463||10.1519|
|ICICI Prudential Life – Flexi Balanced Fund II||9.2158||11.3592|
|ICICI Prudential Life – Flexi Balanced Fund IV||9.1809||11.3145|
|ICICI Prudential Life – Pension Multi Cap Balanced Fund||9.1566||11.1146|
|HDFC Standard Life – Vantage Wealth Builder Fund||9.0401||9.2174|
|Kotak Group Balanced Fund||8.949||10.2059|
|Tata AIA Life – Whole Life Aggressive Growth Fund||8.8766||10.9838|
|LIC of India – Child Fortune Plus Growth||8.8318||11.4613|
|ICICI Prudential Life – Pension Flexi Balanced Fund II||8.6532||10.7607|
|Kotak Dynamic Balanced Fund||8.6101||9.8623|
EPF, VPF, PPF The provident funds offered by the government are small savings schemes that have an assured rate of interest and the other major benefit they offer is that the entire proceeds on maturity are tax free. Employee PF is automatically deducted from salary and both the taxpayer and their employer contribute to it, increasing the savings.
The following is a table that shows how a small investment can reap big dividends. This is how much one can gain by regular contribution of Rs 1000 monthly to a provident fund account (@ 8.7%p.a interest)
|Year||Maturity value at end of year|
This is a new small savings scheme in the name of the girl child. It offers the highest rate of 9.2% among the guaranteed investments and although the lock-in period is long (until the girl child reaches 21 years of age), it offers a good investment option for those saving for their daughter’s education and marriage.
Senior Citizens Saving Scheme
This is a scheme that benefits senior citizens over 60 or those aged more than 55 who have availed superannuation. They can invest upto a maximum of Rs 15 Lakh in this scheme and avail interest of 9.3% compounded quarterly and paid out quarterly. However, the income will be taxable as per normal rates.
Bank Fixed Deposits
These are tax saving deposits of major banks. The interest rate varies based on the bank and usually there is an additional ½ to 1 percentage point interest given for senior citizen deposits. The following is a snapshot of interest rates as on January 1st 2016.
|The Ratnakar Bank||8.75%||9.25%|
|Tamilnad Mercantile Bank Ltd||8.05%||8.55%|
|Lakshmi Vilas Bank||7.80%||7.80%|
|City Union Bank||7.75%||7.75%|
|State Bank of Bikaner and Jaipur||7.75%||8.25%|
|State Bank of Hyderabad||7.75%||8.05%|
|Catholic Syrian Bank||7.60%||8.10%|
|Bank of Maharashtra||7.50%||8.00%|
|Central Bank of India||7.50%||8.00%|
|Indus Ind Bank||7.50%||8.00%|
|Oriental Bank of Commerce||7.50%||8.00%|
|South Indian Bank||7.50%||8.00%|
|State Bank of Patiala||7.42%||7.82%|
|Bank of Baroda||7.30%||7.80%|
|Bank of India||7.25%||7.75%|
|Indian Overseas Bank||7.25%||7.75%|
|Kotak Mahindra Bank||7.25%||7.75%|
|Punjab and Sind Bank||7.25%||7.75%|
|Punjab National Bank||7.25%||7.75%|
|State Bank of Travancore||7.25%||7.25%|
|Union Bank of India||7.25%||7.75%|
|State Bank of India||7.00%||7.25%|
|United Bank of India||6.75%||7.25%|
National Pension Scheme
National Pension Scheme is a government approved pension scheme for Indian citizens in the 18-60 age group. Under NPS, two types of account would be available:
- Tier I: where contributions into the pension account has restrictions on withdrawal.
- Tier II: a voluntary saving account from which one is free to withdraw whenever he wishes. An active Tier 1 account is required for opening a Tier II account.
There are three main asset classes in which the investments will occur; equity, GOI securities and other fixed income instruments. The fund will be managed by fund managers appointed by the Pension Funds Regulatory Authority such as LIC, SBI, ICICI, Kotak, Reliance and UTI.
While the advantage of this scheme is that an additional Rs. 50,000 is available for tax deduction, the main disadvantage is that a person has to purchase an annuity from most of the accumulated savings and only a limited amount can be taken as a lumpsum. Also, all proceeds are taxable on receipt.
This is one of the best tax benefit schemes available. There are two main parts to the home loan tax benefit, principal and interest repayment. Details are as follows:
- Principal repayment: The principal repayment deduction is available up to Rs. 1,50,000 within the overall limit of Section 80C. This is not possible to claim deduction on under construction homes.
- Stamp duty and registration charges: these can also be claimed u/s 80 C
- Interest repayment: This can be claimed U/s 24. For self-occupied home loans, the maximum limit for deductions is Rs. 2,00,000 while there is no limit for rental property. If interest payment has been made for an under construction home, it will be allowed as deduction in five instalments after completion.
- A further one-time deduction of Rs 1,00,000 has been allowed u/s 80 EE on interest paid by first-time home buyers. To avail this, the homes should cost less than Rs. 40 Lakh and loan should be less than Rs. 25 Lakh.
Rajiv Gandhi Equity Savings Scheme
Under this scheme, first time investors whose gross total income is less than Rs. 12 lakhs can invest in equities specified including equities listed in BSE 100 or CNX 100, shares of public sector companies categorised by the Government as Maharatna,Navratna, or Miniratna. Select ETFs and Mutual funds, and IPOs of public sector undertakings fulfilling certain criteria are also eligible.Under Sec 80 CCG, the deduction is the lower of either 50% of amount invested or Rs 50,000.The deduction will be available for three consecutive years and despite the three-year lock in, the investor would be able to trade after one year.
National Savings Certificatecan be bought from designated Post Offices. They come in 5-year and 10-year issues, with the 5-year certificate providing 8.5% interest and the 10-year certificate providing 8.8% interest. However, although there is a deduction on investment (within the limits of Rs. 1.5 Lakh u/s 80 C), the interest is taxable on receipt, although accrued interest can be set off u/s 80 C.
Tax free infrastructure bonds in the rail road and irrigation sectors have once again been introduced by the government and can be a way to increase tax savings. It provides additional benefit if the tax payer invests in bonds of infrastructure companies like IDFC, L&T, IDBI, IIFCL, IFCI etc. The interest income of these bonds is also completely tax free making them an attractive option despite the long holding period of ten to twenty years The interest rates are based on government security rates and they can also be traded in the secondary market, making them an attractive low risk debt investment option for those in the higher tax brackets.
Credits- Neena Shastry
Research Desk – Dilzer Consultants Pvt Ltd
25 Jan 2016