Monday, January 19, 2015

Section 80C Tax Savings

Section 80C overview

 

A good tax-saving investment must be an investment first and a tax-saver later. There are a number of schemes available to reduce your tax liability. Of the various options available under section 80C (see previous chapter for details), the more useful is Equity-Linked Savings Scheme (ELSS).

 

Basically an equity mutual fund, this is useful for most salary-earners as they already have some amount going into fixed income through PF deductions. To balance that fixed-income exposure, equity-based investments are the best option. Moreover, at three years, the lock-in for equity-linked saving schemes is shorter than all fixed income options.

 

In this category, here are details of the major options:

 

ELSS Funds
These are pure equity funds and have a three year lock-in, you can deduct the amount invested from your taxable income and the returns on redemption, after lock-in, are tax free.

The returns are tax free by virtue of these funds being equity funds. Long-term gains (meaning gains on investments that have been held for more than one year) are tax free on all equity and equity fund investments, and that applies to ELSS too.

 

National Savings Certificate (NSC)
This is a popular and safe small savings instrument that combines tax-savings with guaranteed returns.

Investments
Minimum:
R100 per annum with certificates available in denominations of R100, R500, R1,000, R5,000 and R10,000.

Interest
8.5% compounded half yearly on a 5-year tenure
8.8% compounded half yearly on a 10-year tenure

Tenure: 5 years and 10 years. Backed by the government, this is one of the safest investment options available at post-offices, which is used by many to create a regular monthly income stream in retirement.

 

Public Provident Fund (PPF)
This is a long-term savings instrument established by the Central Government, which offers tax concessions on savings as well as withdrawal after the lock-in period. A maximum of 12 deposits are allowed in a financial year

Investments
Minimum:
R500 per annum
Maximum:
R1.5 lakh per annum
Interest: 8.70 per cent compounded annually
Tenure: 15 years. The PPF account matures after 15 years but the contribution has to be made for 16 years in all. One can extend the account in blocks of 5 years on completion of 15 years.

 

Unit Linked Insurance Plan (ULIP)
ULIPs are hybrid products that mix life insurance and investments. Like any other life insurance product, these offer life cover along with investment. However, it is left to the policyholder to make the investment choice from the available fund option, thereby transferring the risk of investment to the policyholder. Though these policies can be more profitable than a traditional insurance policy; they also have higher risk.

Capital Protection
The sum assured in a life insurance policy is guaranteed as per the terms of the policy as long as the premiums are paid and the policy is in force.

Inflation Protection
Life insurance is not inflation protected because insurance is a fixed cover, fixed tenure product, wherein the sum assured is fixed. However, the equity fund option has all the potential to beat inflation and create wealth over the long-term. But it does not guarantee inflation beating returns.

 

Guarantees
The sum assured is guaranteed and the premium is fixed for the tenure of the policy. There are a few with profit policies that guarantee a minimum return, which varies across insurers and policies.

Liquidity
Ulips are liquid only after the lock-in period of five years, which, with changes in the budget, technically goes up to ten years. This is achieved by redeeming units which the premiums are invested in. One can also make premature withdrawal or surrender the policy at a loss.

 

NATIONAL PENSION SYSTEM (NPS)
The National Pension System is a closely regulated system which can provide pension benefits to all Indian citizens. Any individual whether employed with private sector, self employed or professional can now avail of pension benefits and plan his or her retirement by enrolling in this scheme. The NPS is by far the least complicated, simplest and the lowest cost pension system.

Inflation Protection The NPS is a market-linked product which does not guarantee returns or inflation protection. There are no guaranteed returns in the NPS.

 

Liquidity
The NPS is liquid and allows for early withdrawal. At present there is no guideline on loan against the NPS, but this may come into effect in the future.

 

Exit Option
Tier-I: If you retire before 60, you can withdraw 20 per cent of your savings as a lump sum and use the remaining 80 per cent in your Tier-I account to purchase the annuity.

 

If you retire at 60 years, you will be required to invest minimum 40 per cent of accumulated savings towards life annuity. The remaining amount can be withdrawn in lumpsum or spread over a period between the age of 60 and 70.

 

Tier -II: In this voluntary account, you will be free to withdraw your savings from this account as per your wish. Saving tax through Mutual Funds Saving tax through Mutual Funds.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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