As the fog of new year celebrations clear, you realize that you still need to make tax saving investments. While you are frantically looking for your tax saving options, often you miss out on the financial goals. This year let’s make it different. Though, this financial year too, we are in the last quarter and looking to save tax fast.
Here we have listed some of the tax saving options, which are not just tax-efficient but also align with your long-term financial goals.
While investing in any instrument, it‘s important to keep an eye on the taxability of its income. If the income earned is taxable, even partial taxable, the scope to build wealth over long-term gets constrained as taxes will eat into the returns. From a survey, Some questions which always haunts an investor for decades, include:
- What is the maximum I can save on taxes?
- How do I learn about my Investment and Taxes?
- PPF, FD, or Insurance for saving tax?
- How am I paying more tax than my boss with Higher Income?
If you are also worried from the above thoughts, here are few such tax savers that not only help you save tax but also help you earn Tax-free Income. But, not all are the same in terms of features and asset class, so making the right choice is essential.
Tax Saving Options in Equity
Few instruments offer complete tax exemption. Following are your two tax saving options, which are best suited for your long-term financial goals, such as retirement, vehicle upgrade, second home purchase or even your kids’ grand marriage expenses.
Equity Linked Savings Scheme (ELSS)
- ELSS Tax saving Mutual Funds are the Mutual Fund schemes where one can get tax benefit on the savings up to Rs. 1.5 Lakhs p.a.
- Like any other mutual funds, returns from ELSS Tax saving Mutual funds are not guaranteed. You can get higher returns ranging from 12%-18% by Investing in these ELSS Funds.
- Returns from such funds are tax-free as it is an equity mutual fund where you are investing for more than 3 years period.
- Investors can opt for dividend option and get regular income even during the lock-in package
- Investing in ELSS Funds through SIP Every month would help you reduce the burden of investing a lump sum, take care of market fluctuations and provide higher returns. One should note that each month SIP would have a lock-in period of 3 yrs. Eg. If your SIP starts in Nov 2017, the lock-in period of 3 years ends in Oct 2020. However, your second SIP which you invested in Dec 2017, would have lock-in period until Nov 2020.
- Returns from such ELSS funds are tax-free as it is an equity mutual fund where you are investing for more than 3 years period.
- To mitigate risks, one may diversify across more than one ELSS scheme (based on market capitalization and industry exposure)after considering their long-term consistent performance.
- After the lock-in ends, one may continue with the ELSS investments similar to any open-ended MF scheme. However, review its performance against its benchmark before doing so. Investing in ELSS not only helps you save for a long-term goal but also helps you save tax and generate tax-exempt income.
If you are Young and cleared with your goals but in a dilemma of tax saving, this investment scheme is an ideal destination for you. You can avail tax benefit on the savings up to Rs. 1.5 lacs p.a. and an additional Gold Plated Returns of 12%-18% by investing in these ELSS Funds.
Unit Linked Insurance Plan (ULIPs)
ULIPs are quite versatile when it comes to tax saving. While they have equity investment option, ULIPs also have tax saving options for safety-seeking investors, with the same tax benefits.
- ULIP is a hybrid product, a combo of protection and saving. It not only provides life Insurance but also helps channel one’s savings into various market-linked assets for meeting long-term goals.
- In most ULIP’s there are 5 to 9 fund options with varying asset allocation between equity and Debt. A ULIP can have a duration of 15 or 20 years or more but the lock-in period is 5 years. The Fund value on exiting the policy (allowed after 5 years) or on maturity is tax-free. Any switching between the fund’s options irrespective of the holding period is exempt from tax.
These type of plans are becoming inevitably popular in the Indian markets. These are structured according to the needs of present Investor who is in need of both Insurance and Investment. But these schemes carry a lot of costs with them. Even surrendering a policy before maturity will eat your major return. So you, need to do a lot of research and analysis before investing in such instruments.
New Pension Scheme (NPS)
- NPS Returns vary. In last 5 years, several NPS funds gave returns between 10% -15%. If you can invest in good NPS Fund, you can grab the opportunity of earning between 12% to 15% which can be easily comparable with Mutual fund Returns.
- This is low-cost Investment option. The fund management charges are very low at 0.0009% of Investment value.
- You can invest Rs. 500 per month or Rs. 6000 per Annum. There is no maximum limit for investment in NPS. However, you can invest in Rs. 1.5 lacs in tier 1 scheme and get tax exemption u/s 80c.
- Investors have the choice to opt for allocation of equity, bonds and guilts.
- Maturity amount is taxable
So this year end, get free from all the tax worries. Invest Prudently. These Tax Saving schemes would help you to invest under section 80c up to Rs. 1.5 lakhs, another Rs. 50,000 under NPS, Home Loan Interest Of 2 lakhs and First time home buyers interest rebate of Rs. 50,000 totaling to Rs. 4.5 lakhs. You need not consider all options. You can consider some of these investment options which are best suitable to you based on your investment tenure, risk appetite and features indicated above.
Interest Earning (Safe) Tax Saving Options
Public Provident Fund (PPF)
- The current rate of interest on PPF is 7.8 % p.a. (Oct-Dec 2017). Interest received is tax-free at maturity
- It has a lock-in period of 15 years
- Investment up to Rs. 1.5 lacs is eligible for income tax rate U/S 80C.
- Loan facility in PPF Account is available from the 3rd Financial year up to the 5th financial year. The rate of interest charged on loan shall be 2% p.a. above the interest paid.
- Till now, Non-Resident Indians are not eligible to take PPF. But as per new PPF rules in October 2017, NRI’s would get only post office SB Interest if they continue the PPF without closure.
- You can invest in PPF every month. If you can invest by 5th of the month, you will receive the interest for the remaining period of that month. If you invest Rs. 1.5 lacs before 5th April, you would receive interest for the entire fiscal year which can help you maximise the returns from PPF over the 15 years period.
- PPF offers several good features and it is one of the best investment plans to save tax u/s 80c in AY 2018-19. This is suitable for those who want tax savings and who want to accumulate funds for retirement purpose or children marriage or for children education and for those who are looking for safe and highest returns.
Public Provident Fund has always been the favorite investment scheme for the Indian Investors. But be sure, invest in it when you have ample time to let it harvest (min. 15 yrs.). No doubt you can save good tax by investing but you cannot withdraw your funds when needed. If you have your retirement issues in mind, invest in it selflessly. You will remember it for life.
Sukanya Samriddhi Yojana (SSY)
- Sukanya Samriddhi Yojana is a small deposit scheme for the girl child launched as part of the“ Beti Bachao Beti Padhao‘“ campaign.
- Interest rates are 8.3% p.a. (Oct to – Dec 2017)
- Parents /guardian can make deposits till the girl attains 15 years of age. The account gets matured once the girl reaches 21 years of age. No deposits to be made between the 16th year to 21st year.
- The Interest received on maturity is tax-free.
- One can Review Sukanya Samriddhi Account scheme details before investing in such tax saving Investment plan.
- Currently, SSY offers the highest tax-free return with a sovereign guarantee and comes with the Exempt-Exempt-Exempt (EEE Status). The annual deposit (contributions) qualifies for Section 80C benefit and the maturity benefits are non-taxable.
- This is one of the old and best investment plans to save Income tax under sec 80 C of IT act.
If you have your little daughter in your home, this scheme is for you. Not just for the tax saving purpose but also for the security of your child. If you have not invested in this till yet, invest today. You can only contribute once as this is an annual contribution but you have three months there to go. SSY offers the highest tax-free return with a sovereign guarantee and comes with the Exempt-Exempt-Exempt (EEE Status). The annual deposit (contributions) qualifies for Section 80C benefit and the maturity benefits are non-taxable.
Tax saver Bank FD Schemes
- Currently, after Demonetization from last year, interest rates have fallen dramatically. Latest Interest rates are between 4.5% to 7.5% per annum
- Interest received from tax saving bank FD schemes are taxable.
- Tax saver FD schemes have a 5-year lock-in period.
This is one of the old and best Investment plans to save income tax under 80 C of IT Act for those who are not in a good position to have taken in risky Investments. Ideal for people who want tax deduction but are conservative in risk profile and satisfied with the Normal returns.
Senior Citizen Saving Schemes (SCSSs)
- Individual of the age of 60 years or more can open this SCSS account for tax saving purpose
- Interest rates are at 8.3% p.a. (Oct to Dec 2017)
- Maturity period is 5 years
- Interest is paid at the end of every quarter. This is one of the best Investment option to save tax for senior citizens as they would get quarterly interest
- The maximum Investment limit is Rs. 15 lakhs
- Interest earned is taxable like any other fixed deposit scheme
- Premature closure is allowed after one year on deduction of an amount equal to 1.5% of the deposit and after 2 years, 1% of the deposit
This tax saving scheme provides assured returns for Senior Citizens. The principal amount is safe as they are backed by Government. If you have dependent parents, you can choose this scheme. It will provide tax shelter in the form of 80c deduction along with the return.
Tax Saving Options for Home Buyers
If you’ve been looking for a home for some-time and in the final vestiges of buying one, perhaps the following information will be helpful. A home purchase is not just a necessity of life, it’s also one of the best tax saving options available.
Interest on Home Loan – Section 24
If you wanted to purchase your own dream home this year but unable to do so, due to lack of funds or anything else, don’t be sad. The year has not yet gone. You can go for one now also by taking a home loan. Home loan interest, if paid on a constructed house, makes you eligible for an additional deduction of up to Rs. 200,000 each year.
If you have still not brought your dream home, you can go for one now and get tax exemption on home loan principal repayment. You are eligible for tax exemption for the repayment you make towards your home loan principal. If you do not have any home, you can consider it as a priority and Tax Exemption too.
Home Loan Principal Repayment
This is another good Investment option to save tax u/s 80c at the end of the year who are looking to save for the retirement. It’s been extremely popular nowadays, due to its high return giving capability at low cost. You can invest in Rs. 1.5 lacs in tier 1 scheme and get tax exemption u/s 80c.
Most of the tax saving options discussed above fall under section 80C of the Income Tax Act. As mentioned in the table the combined deduction on all these instruments will be limited to Rs. 150,000 in any assessment year. However, some of these tax saving options allow additional deductions. For example, NPS allows additional deduction of Rs. 50,000.