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.

1. Equity Linked Savings Scheme (ELSS) Funds
2. Unit Linked Insurance Plan (ULIP)
3. National Pension Scheme (NPS)
4. Public Provident Fund (PPF)
5. Employee Provident Fund (EPF)
6. Voluntary Provident Fund (VPF)
7. SukanyaSamriddhi Scheme
8. Senior citizen saving scheme
9. Bank Tax Saver Fixed Deposits
10. Pension Plans
11. Life Insurance Policies
12. Home loan payment
13. National Savings Certificate (NSC)
14. Infrastructure bonds
15. Children’s Tuition Fees reimbursement
16. 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.

SOME ADDITIONAL DETAILS

ELSS

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.

Insurance

Life Insurance is very confusing given the variety of schemes available. However, they are all variants of the following schemes:

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)

SukanyaSamriddhiScheme

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 1^st 2016.

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.

Home Loans

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.

NSC

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.

Infrastructure Bonds

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