The Income Tax Act, 1961 is the fundamental law of our country that lays downs the rules, regulations, exemptions and procedures pertaining to taxation. There are other laws as well which govern various taxes in the country, but the Income Tax Act, 1961 is the one that affects us most as individuals.
Taxable income, deductions, exemptions etc. sound like a lot of financial jargon that is complex and confusing for the layman. This leads to expenses and investments that do not yield any benefit from the tax perspective for a citizen.
So here we are, giving you the basic information on tax savings investments, which will help you in making better economic decisions for FY 2018-19.
At the outset, let us first understand the difference between tax evasion and tax savings. A lot of times, people confuse instruments which reduce their burden of taxation as “tax evasive”. That is completely untrue. Tax evasion, is an illegal activity, where the individual purposefully hides their income from the government, to avoid paying their due.
Tax savings investments on the other hand are legal, financial instruments, on which the person paying taxes can claim a deduction and lessen the amount of tax he/she has to pay. While putting your money in tax savings investments one must also look whether the income that will be earned through these instruments will be tax free.
Following are the details on Tax Savings Investments:
The National Savings Certificate (NSC) :
The National Savings Certificate is one of India’s oldest investment schemes. It is a scheme created by the Government of India, and is executed by the Postal Department. Since, it has the backing of the Central Government, is it the safest option for investments. The lock in period for NSC is 5 years. The minimum amount that can be invested in a NSC is Rs. 500. But the good news is there is no maximum ceiling limit on the investment. The interest rate is a steady 7-8% p.a. The deduction for interest income received on NSC can be claimed under Section 80C while filing your income tax returns.
Equity Linked Savings Scheme (ELSS):
Equity Linked Savings Schemes or ELSS are tax saving investments in diversified mutual funds. Every mutual fund house has a product which qualifies as an ELSS. The mutual fund houses may brand them differently, but the core product remains the same. An ELSS gives returns in the form of dividend. But the dividend given by a mutual fund house for ELSS is not the same as the dividend from equity shares. In an ELSS the dividend comes out from the NAV (Net Asset Value) of the fund. The returns from ELSS are deductible under Section 80C of the Income Tax Act, 1961. There is a lock in period of 3 years for ELSS.
Another point to be noted about the dividend from ELSS is that if the exposure of the mutual fund is more than 65% to the equity market then they are subject to LTCG (Long Term Capital Gains Tax) under the new budget.
Public Provident Fund (PPF):
The Public Provident Fund or PPF is a strong and reliable name in the minds of Indians. The Public Provident Fund (Scheme), 1968 has been a roaring success since its inception, decades ago. The scheme is a minimum 15 year plan, with the option to continue it in blocks of 5 years post the initial 15 years.
This tax savings investments gives you a guaranteed return of 7-8% p.a. Since it is a government of India initiative, the principal and the interest are both tax free. This investment definitely falls under the category of “Safety Net” investments!
A PPF can also be opened by a guardian in the name of a minor. It can be opened in any post office within the country or a bank branch. The minimum amount of investment necessary is Rs. 500, thus making it accessible to even low income groups.
This tax savings investment is a great option for retirement plans, or long term goals, such as children’s higher education or marriages.
Employees’ Provident Fund (EPF):
EPF is a smaller subset of PPF. This is a great option for salaried individuals. This is an involuntary form of tax savings investments. The employee has to contribute an amount of 12% of their basic salary. The employer also makes a matching contribution to the EPF. But out of the employer’s contribution only 3.67% goes to the EPF.
The employee’s contribution are all eligible for deduction under Section 80C of the Income Tax Act, 1961. The ceiling limit of Rs. 1.5 lakhs is the maximum under Section 80C.
The EPF was created to inculcate the habit of savings in the masses. The interest rate on EPF is somewhere between 8-9%.
If someone wishes to increase their contribution in an EPF, the government allows them to do so. In fact the basic contribution is 12% of basic, but the maximum is 100% of basic + DA (Dearness Allowance). This higher contribution will convert the EPF into a VPF i.e Voluntary Provident Fund. The VPF also falls under EPF, therefore all the rules that apply to VPF are the same as EPF. The interest income earned on VPF is also tax free. But the catch is EPF and VPF, or EPF only (as applicable to individuals) have to be a continuous investment, without any interruptions in between.
Unit Linked Insurance Plans (ULIP):
Unit Linked Insurance Plans or ULIPs as they are popularly called are an offering from the insurance industry. They are a mix of risk cover and investment. ULIPs are ideally a good investment option for long term financial goals such as wealth creation, children’s education and retirement planning.
ULIPs are tax savings investments, which are safe and guarantee a steady income to the policyholder. All insurance companies offer ULIPs. The amount of money put in ULIPs is generally invested in a mix of funds, namely debt and equity funds. ULIPs are eligible for deduction under Section 80C. They give you a return of around 8-9% p.a, depending on your insurance company and the choices of investments it makes. ULIPs have a minimum lock in period of 5 years.
While investing in ULIPs, it is advised that only put in the money which you won’t be needing in a year or two. The surrender charges under ULIP are damaging to an individual.
Insurance Policies:
When it comes to tax saving investments how can we forget the traditional insurance policies. The premium contributed towards any insurance policy is qualified for a tax deduction under Section 80C.
An insurance policy could be an endowment or a whole life plan or a money back plan. All of these plans have a few things in common, savings and maturity benefits. An insurance policy is a great way to ensure that your loved ones are well taken care of in case of an unfortunate event happening to you.
Insurance plans are meant for the long haul. They have a minimum period of 5 years and more. The premium charged by the company for this tax savings investment will depend on various factors, such as age, income, life expectancy, any other preexisting health ailments etc. The maturity amount are all tax free!
Sukanya Samriddhi Yojana (SSY):
We live in a country where we have a skewed sex ratio, which means on an average there are more boys in India than girls. A skewed sex ratio is not the sign of a progressive nation. We need to give our girls equal rights and opportunities as the boys. The government of India has come up with the scheme “Beti Bachao, Beti Padhao” as means to protect, nurture and educate girl children.
Under the “Beti Bachao, Beti Padhao” movement, they have launched the Sukanya Samriddhi Yojana (SSY) to encourage parents to save and spend on their daughter’s education. A Sukanya Samriddhi Account can be opened at any time after the birth of the girl child till the day she turns into a 10-year-old. The minimum deposit amount is Rs. 1,000 and the maximum is Rs. 1.5 lakhs. The account fetches an average interest rate of about 8% p.a and is tax free!
The account will remain open for 21 years from the date of opening it or until the day the daughter gets married after the age of 18.
These are some of the best tax free savings investments in the country. We all want to increase our income and we all want to ensure that the increased income doesn’t lead to an increased burden of taxes. The above-mentioned ways are some of the best instruments which are tax savings investments. All these tax savings investments have the added benefit of savings for yourself, interest income or dividend income or maturity benefits etc. and long term plan fulfilment.
Tax planning is a vital part of financial planning. If we do not plan our taxes properly, we may end up spending a sizable chunk of money on taxes. These taxes could have easily been saved by proper planning and investments. As a well-informed individual you do not wish to spend unnecessary money on taxes.
