Best Tax Saving Investment Options: An Objective Review (Part 1 of 2) - Section 80C of Income Tax Act allows tax payers to claim deductions from their taxable income (upto Rs 1 Lakh) by investing in certain instruments. These options can broadly be classified under three categories
- Expenses like Tuition Fees, Home Loan Principal Payment and Stamp Duty & Registration charges (for home)
- Fixed Income investments like PF, PPF, NSC, 5 year tax saving bank FD, 5 year Post Office deposit, Senior Citizen Saving Scheme and Infrastructure Bonds
- Market Linked investments like ELSS, Life Insurance Premiums, ULIP, Pension Fund and National Pension Scheme
In this 2 part series, we will compare and contrast the different 80C Fixed Income and Market Linked Investments, on some important parameters like returns, liquidity, capital safety and taxability of income / returns. You should evaluate which parameter is important to you, based on your risk profile and financial goals, to objectively determine the most suitable tax saving investment for you. Here is a review of the fixed income investment options under section 80C:-
Employee contribution to Provident Fund (EPF):Your employer deducts your contribution to your PF account from your monthly pay cheque (12% of your basic salary).The annual interest earned on your PF savings is 8.5%. Provident Fund allows very limited liquidity since you cannot access the funds till your retirement. However, under certain special circumstances you can take a loan from your PF account. The interest earned under EPF is tax free. You can make voluntary contributions over and above the EPF (12% of basic salary), and the tax treatment is the same.
Public Provident Fund (PPF):PPF is one the most popular choices under Section 80C, since this offers decent interest rates, ensures capital safety and better liquidity than a lot of other instruments. PPF interest rate has been fixed at 8.7% for this fiscal year (2013 – 14). Though rates will vary from year to year, the yield has been pegged at 25 basis points above the 10 year Government Bond yield. The tenure of this instrument is 15 years, and is extendable in blocks of 5 years. Withdrawals not exceeding 50% of 4th year balance are permitted after a lock-in period of 7 years. PPF also offers loan facilities. The maximum and investment under PPF is Rs 1 lakh and Rs 500/-.
National Savings Certificates (NSC):NSC has been a popular investment choice for many years. In the new NSC scheme the interest rates at 8.5% and 8.8%, for the 5 and 10 year maturities respectively. However, the effective returns are lower, since interest earned in NSC is fully taxable, at your income tax slab rate
5 year Tax Saving Bank Fixed Deposit:5 year Tax Saving Bank Fixed Deposits are very similar in nature to NSC. Interest rates offered differs from bank to bank. Currently it is in the range of 8 to 9.1%. Maximum allowable investment is Rs 1 lakh in one year. It is important to note that like NSCs, interest earned by FDs is fully taxable, at the applicable slab rate.
5 year Post Office time deposit:The 5 year Post Office time deposit, is in many ways similar to the above two instruments. The current annual interest rate for the 5 year time deposit is 8.4%. Minimum investment is Rs 200, and there is no upper limit. The interest is however fully taxable
Tax Free Infrastructure Bonds:Infrastructure bonds are becoming increasingly popular choices especially for investors in the higher tax bracket. Infrastructure bonds offer attractive yields, especially compared to bank FDs on a tax adjusted basis. Though the coupon or interest rate varies from issuer to issuer, recent issues by HUDCO and NTPC offered coupon rates of 8.4 to 9%. These bonds are of different tenures from 10 – 20 years. There is no lock-in period for this investment.
Senior Citizen Saving Scheme (SCSS):This is one of best investment schemes for Senior Citizen. The interest rate on this investment is 9.2%. The scheme allows for an investment upto Rs 15 lakhs and the investor receives interest on a quarterly basis. The maturity of the scheme is 5 years, extendable by another 3 years. The SCSS offers liquidity to the seniors, by allowing premature withdrawals (however charges of 1.5% and 1% deductions in interest apply for closure after 1 and 2 years respectively). The interest earned in this scheme is taxable.
Here is summary analysis of the fixed income investments under Section 80C
Tomorrow will compare and contrast the market linked investment options under Section 80C.
To be continued......