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Best options under Section 80C
The Budget has raised the deduction limit. Here are the options in which you can invest to save tax.
PPF
The PPF is an all-time favourite investment option and the Budget has only made it more attractive by enhancing the annual investment limit to `1.5 lakh. The PPF offers investors a lot of flexibility. You can open an account in a post office branch or a bank. The maximum investment of `1.5 lakh in a year can be done as a lump sum or as instalments on any working day of the year. Just make sure you invest the minimum `500 in your PPF account in a year, otherwise you will be slapped with a nominal, but irksome, penalty of `50. Though the PPF account matures in 15 years, you can extend it in blocks of five years each. The PPF is useful for risk-averse investors, self-employed professionals and those not covered by the EPF.
ELSS Funds
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-saving options under Section 80C. But this should not be the most important reason for investing in this avenue.
Being equity funds, these schemes can generate good returns for investors over the long term. The minimum investment in ELSS funds is very low. Though regular equity mutual funds have a minimum investment of `5,000, you can put in as little as `500 in an ELSS scheme. Unlike a Ulip, pension plan or an insurance policy, there is no compulsion to continue investments in subsequent years.
To make most of ELSS funds, stagger your investment over a period of time instead of putting a large sum at one go.
Ulips
The 2010 guidelines have made Ulips more customer-friendly. A new online Ulip launched by HDFC Life charges only 1.35% for fund management. There is no other charge except for the risk cover provided by the policy. This makes the click2invest policy even cheaper than direct mutual funds. Keep in mind that a Ulip yields good results only if held for at least 10-12 years.
SCSS
This assured return scheme is the best tax saving avenue for senior citizens. However, the `15 lakh investment limit somewhat curtails its utility. The interest rate is 100 basis points above the 5-year government bond yield. The interest is paid on 31 March, 30 June, 30 September and 31 December, irrespective of when you start investing.
NPS
Its low-cost structure, flexibility and other investor-friendly features make the New Pension Scheme an ideal investment vehicle for retirement planning. The scheme scores high on flexibility. The minimum investment of `6,000 can be invested as a lump sum or in instalments of at least `500. There is no limit. The investor also decides the allocation to equity, corporate bonds and gilts. Be ready for a lot of legwork before you can buy.
Bank FDs and NSCs
Don't get misled by the high interest rates offered on the 5-year bank fixed deposits. Interest income is fully taxable so the post-tax yield may not be as high as you think. In the 20% and 30% income tax brackets, it is not as attractive as the yield of the tax-free PPF.
Life Insurance plans
Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly, they are still the worst way to save tax. The tax saving is only meant to reduce the cost of insurance. It is not the core objective of the policy.
Pension plans
The charges of pension plans offered by life insurers are significantly higher than those of the NPS. The difference can snowball into a wide gap over the long term. The other problem is that annuity income is still not tax-free, which makes pension plans rather unattractive for retirees.
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