Mr. Adhil Shetty, BankBazaar.com
One of the most
common financial mistakes people commit is choosing the wrong tax-saving
instrument.
While there are
scores of tax-saving avenues in the market, good financial planning involves
selecting those that are best suited to your needs so that they not only reduce
the tax burden, but also benefit you financially.
Public Provident
Fund..
PPF - Public
Provident Fund is one of the most popular tax-saving instruments. Now that PPF
interest rates have been linked to bond yields in the secondary market, they
offer returns at par with other instruments.
While the maturity
amount as well as interest earned on PPF are tax-free, the ease of opening an
account and liquidity are a plus. PPF is especially suitable for low-risk
investors.
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| Mr. Adhil Shetty, BankBazaar.com |
Equity-Linked Savings
Schemes..
ELSS - Equity-Linked Savings Schemes.. are a more
risky proposition than PPF. With good returns and a tax-free status, ELSS play
a crucial role in effective tax management.
They have a 3 year
lock-in, which is among the smallest amid all instruments covered under Section
80C of the Income-Tax Act. Being an equity-linked fund, there is, however, no
guarantee of returns as they mirror the stock-markets and the general financial
sentiment.
Unit-Linked Insurance
Plans..
Ulips - Unit-Linked Insurance Plans.. are
market-linked insurance schemes that offer tax-saving options under Section
80C. Ulips offer advantages of life cover with investment in equity and debt
markets, along with serving as a tax-saving instrument. The downside is higher
premiums and discontinuation of policy if one takes a premium holiday. One can
opt for a debt-market-linked Ulip and move to equity during a bull run.
Voluntary PF..
Voluntary Provident
Fund (VPF) is a lesser known tax-saving instrument, but quite as useful.
Designed as an extension of the Employees’ Provident Fund, a voluntary PF
account can be created with the help of an employer in each financial year.
Once initiated, the
employer will deduct 12 % of the basic and dearness allowance from the salary
and transfer it to the VPF account. The employer would also need to contribute
12 % funds from his side to the EPF account. But, VPF accounts offer very
limited liquidity and funds cannot be withdrawn until one retires or / quits the job.
Senior Citizen
Savings Scheme..
SCSS offer 9 % annual
returns on deposits. Only people above the age of 60 can opt for this scheme.
Though one can open multiple saving scheme accounts, the total amount of
investment cannot exceed Rs.15 lakh. SCSS qualifies for deduction under Section
80C, but the interest earned is taxable.
National Pension
Scheme..
An ideal investment
vehicle for retirement planning, it offers tax-saving under Section 80 C. But,
the deductions are allowed only for contributions to a Tier-I NPS account with
a minimum annual investment of Rs. 6,000. Also, no premature withdrawals are
allowed.
National Savings
Certificates and Bank FDs:
NSC (National
Savings Certificates) and bank FDs
(Fixed Deposit) are widely used financial instruments. Deposits, however, are
not tax-free, as is widely believed. Government regulations offer deduction of
up to Rs. 10,000 on interest earned in the savings bank account.
Life Insurance Policies..
The premium paid for
a policy covering an individual and his / her immediate family members is
deductible up to Rs. 1 lakh.
Rajiv Gandhi Equity
Savings Scheme..
Rajiv Gandhi Equity
Savings Scheme - RGESS offers tax
savings for a year for first-time investors. They can claim a deduction of 50%
of the invested amount. The maximum investment amount is fixed at Rs. 50,000
with a maximum deduction of Rs 25,000.
This deduction is
over and above the Rs 1 lakh limit available under Section 80C.
Pension Plans..
Pension plans
initiated by life insurance companies also provide tax deductions under Section
80C since 2013. The downside is high fund-management charges.
The writer Mr. Adhil Shetty is CEO at
BankBazaar.com
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