Top 5 tax saving investment options
18 Jul 2019
Paying taxes is a legal, ethical duty that every individual has to fulfil. The government uses your tax money towards the development and progress of the country. The government even offers some tax relief if one invests in certain instruments. However, most people tend not to follow a disciplined approach with regards to tax savings and investments. Either they begin investing towards the end of the financial year or they choose their investments to avail tax savings benefits. Both these methods of tax saving are wrong. The smart thing to do is to begin investing in the early months of the financial year. You can choose from the top 5 tax saving investment options to avail maximum benefits.
ELSS mutual funds
Specially designed for tax savings, Equity Linked Saving Scheme or ELSS mutual funds are considered one of the best tax saving investments. ELSS funds are market-linked products, which, though regarded as high-risk products, also offer higher returns. ELSS funds allow you to save taxes under Section 80C of the Income Tax Act of 1961. Also, ELSS funds are equity-linked products that come with a short lock-in period of 3 years. Moreover, ELSS investments can also be made through SIP or systematic investment plans, which allows you to spend a small, fixed, monthly amount as opposed to a lump-sum amount at one time.
Public Provident Fund
A favourite of the conservative investor, the PPF refers to the government issued, long-term savings scheme. Launched in 1968, the PPF tax saving scheme allows the investor to earn tax-free returns. Currently, you can earn 7.6% interest per annum on your PPF savings, and is especially beneficial for individuals of high-income slabs, paying 30.9% tax. Such individuals can earn taxable returns of approximately 11.04%. However, it is mandatory for one to deposit at least a minimum amount of ₹500 per annum, whereas the maximum savings per annum cannot exceed ₹1.5 lakhs. Also, the PPF scheme lasts for a minimum period of 15 years, and partial withdrawals can only be made after the 8th year of investment.
Unit Linked Insurance Plans
Regarded as hybrid products that provide both, protection and savings, Unit Linked Insurance Plans or ULIPs are regarded as great tax saving schemes, because they provide the investor with the much-needed life insurance policy, while also helping him invest in different market-linked assets, which help him meet his long-term goals. Most ULIPs come with 5 to 9 fund options, with variable asset allocation between equity and debt. While the duration of ULIPs is approximately 15-20 years, there is a minimum lock-in period of 5 years. Also, the fund value of an ongoing/matured policy is tax-free.
National Pension Scheme
One of the few tax savings schemes, which allow the investor to surpass the maximum ₹1 lakh limit of deduction, as set by Section 80C of the Income Tax Act; the National Pension Scheme or NPS is also ideal for tax saving investments. Under this scheme, the percentage of the investor’s basic salary (not exceeding 10%), as contributed by the employer towards the national pension scheme, is tax deductible. That said, the investor’s contribution towards NPS is still governed under Section 80 C, which allows you to surpass the ₹1 lakh limit.
Health insurance investments
Although not traditionally regarded as an investment for tax saving purposes, health insurance plans offer coverage that adds more value than any other form of investment. Apart from providing you security against unpredictable health scares, you also earn a tax deduction on health insurance plans, making them one of the best tax saving investments. One can avail a tax deduction of up to ₹15,000 on health insurance plans, where the upper limit on tax deduction for senior citizens is ₹20,000.
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Tax Benefits Under NPS One Can Avail of
National Pension Scheme or NPS is a central government scheme for all those who want to save for their retirement days early on. So if your retirement is still some time to go and you are already planning to make arrangement for your golden days, the NPS is your ticket to achieving these goals. There are several benefits of the NPS scheme as it is a low risk scheme. The tax benefits that come with the NPS make it a great choice of investment. Here are some of the NPS tax benefits:
NPS tax benefit for individuals:
Any person subscribing to the NPS is eligible for a tax deduction of 10 % of his/ her gross income up to Rs1.5lakh under the section 80 CCD (1) of the Income Tax Act. In an exclusive tax saving benefit, you are also eligible for an additional deduction for investment up to Rs50,000 in NPS (Tier I account) under subsection 80CCD (1B). This exclusive benefit is over and above the deduction of up to Rs 1.5 lakh under section 80C. NPS tax benefits for individuals under corporate sector
You are eligible for an additional tax benefit if you have subscribed to NPS scheme under the corporate sector. This deduction is under the section 80CCD (2). Under this the employer’s NPS contribution up to 10% of salary (Basic + DA) is deductible from taxable income, without any monetary limit.
NPS tax benefits for corporates
Corporates making contribution towards employee’s NPS is deducted as business expense from their profit and loss account. So the employer’s contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as NPS tax exemption.
NPS tax benefits on partial withdrawal
National pension scheme tax benefits is that you can partially withdraw funds from your NPS tier-I account .This benefit is available for specified purposes only. The amount withdrawn up to 25% of your contribution is exempt from tax.
NPS tax benefit on annuity purchase
If you invest funds in annuity, it is completely exempt from tax. Only the income from annuity received in the subsequent years is taxable.
NPS tax benefit on lump sum withdrawal
When you are 60 years old, if you withdraw the funds in lumpsum, maximum 60% of the corpus can be withdrawn from which 40% of the corpus is exempted from tax.
One of the biggest selling points for NPS is the additional tax benefits attached to the scheme. If you have a low appetite for risk and want to plan for your retirement days, invest in an NPS now. Click here to invest in an NPS tax saving scheme.
What are the Benefits of Recurring Deposits
There are many benefits of recurring deposit.
Most banks have a very low amount of monthly installment. Some banks even have recurring deposit schemes where the installment frequency is quarterly or half yearly. This ensures people with low amount of savings can also invest in such schemes.
Goal based saving
One of the best benefits of recurring deposit is that it helps with goal based savings. Regular monthly installments earn interest and work towards building a corpus for the short term. Installments can be planned so that a required corpus is built up for use in the future. To check the maturity amount for a given installment amount, you can use a recurring deposit interest calculator which is available for free on major bank websites. By using this calculator, you can plan your finances so that your monthly investments build up to the amount you need.
High rate of interest
Recurring deposits earn the same rate of interest as fixed deposits. Thus, these can be used effectively as a tool to earn income. Interest is compounded quarterly on the investments made which helps the investor to earn on interest as well as the principal. Senior citizens can get a higher rate of interest on their recurring deposits.
Saving for minors
Most banks allow recurring deposits to be opened by minors with a joint holding by the parent or the legal guardian. This helps to build investments for the minor’s use.
A recurring deposit is an excellent way of ensuring disciplined investing. Since the installment amount for a recurring deposit has to be paid on the same day every month, the investor is forced to put aside that amount. It inculcates discipline and a savings habit to the extent of the installment amount.
Most banks offer a loan facility on the recurring deposit amount. This loan is given up to 95% of the recurring deposit amount. This can be resorted to in case of any emergency.
Easy to open
Opening a recurring deposit is extremely simple. You do not need to have a savings bank account in that particular bank to open a recurring deposit account. Opening a recurring deposit account can be done online via net banking of the particular bank. In case it is not possible to open it online, you can visit the bank branch, fill up the recurring deposit form and submit the required documents along with a cheque for the installment amount.
The recurring deposit benefits to tax are available when it comes to TDS. Banks deduct tax on the recurring deposit interest only when it exceeds Rs. 10,000 in a particular year. If the total interest amount does not exceed Rs. 10,000, then they do not deduct tax. Also, no tax is deducted if the depositor submits Form 15G/15H certifying that their income is below the no tax limit.
Recurring deposits come with a nomination facility. This means the recurring deposit amount will be paid to the nominee in case of death of the deposit holder. Setting up nomination for a recurring deposit is very simple. This detail can be provided while opening the recurring deposit account.
Deduction on interest earned
While the interest earned on a recurring deposit is chargeable to tax, interest earned up to Rs. 50,000 is deductible under Section 80TTB of the Income Tax Act for senior citizens. This provision ensures a higher amount of income remains in their hands.
A recurring deposit is an excellent investment option for people who have small savings and want to build up a corpus for specific goals