5 tax saving avenues for risk averse investors
Section 80C of the Income Tax Act, 1961 offers galore of investment options which enable you as an individual or a Hindu Undivided Family (HUF) assessee to save tax. But while you invest, it is imperative to recognise to your risk appetite and risk tolerance in order to take a prudent investment decision in the tax planning exercise.
For those who are risk averse (i.e. who risk appetite does not permit them to take high risk and thus they have a disinclination to risk), here are five investment avenues which can help save tax.
- Public Provident Fund (PPF):
The PPF scheme is a statutory scheme of the Central Government of India (framed under the PPF Act of 1968). It is one of the popular and the most tax efficient investment instrument, which is also why, is an investment avenue for resident individuals to plan their retirement through regular investing since the decent tax-free rate of return it earns aids in building a corpus for retirement.
The interest rate on PPF is benchmarked against the 10-year G-Sec Yield and is usually 0.25% higher than the average yield on G-secs. Every year, RBI announces the interest rate on PPF for the upcoming financial year and for the current financial year (i.e. 2014-15) the rate of interest offered on PPF is 8.7% p.a.
In the Interim Budget 2014, the Government raised the limit to maximum amount that can be deposited in a PPF Account every year, from Rs 1,00,000 to Rs 1,50,000; thereby giving more room for tax saving.
In order to invest in PPF, you are required to open a PPF account (which is irrespective of your age) at your nearest post office or public sector (nationalized) bank providing this facility. You can open the account in your name, and also in the name of your wife as well as children. If you do not wish to open a separate account in the name of your wife as well as children, you can nominate them; but joint application is not permissible.
The account so opened will have an expiry term of 15 years from the end of the year in which the initial investment (subscription) to the account is made. You can invest in the account ranging from a minimum of Rs 500 to a maximum of Rs 150,000 in a financial year in order to enjoy the tax saving benefit under Section 80C of the Income Tax Act, 1961; and the amount to the credit of your account will be entitled to a tax-free interest at 8.7% p.a. Your annual deposit in the PPF account should at least be Rs 500, and you have the convenience of depositing in either lump sum or in installments not exceeding 12 such installments. However, a noteworthy point is that it is not necessary to deposit every month and the amount too can be any amount in multiples of Rs 5, subject to the minimum (Rs 500) and maximum (Rs 1,50,000) amount.
The interest to the account will be calculated on the lowest balance to the credit of the account between the close of the 5th day and the end of the month, and will be credited to the account on 31st of March, each year. Therefore in order to earn optimally on your PPF account, ensure that you invest (i.e. your PPF account is credited with the investment amount) on or before the 5th of every month if you were planning to invest on a monthly basis. A point to be noted here is that if the additional amount is not deposited in your PPF account before the 5th of the month, you won't be earning any interest on such additional amount. In such a case, your lowest monthly balance would be as on the 5th of every month and irrespective of the amount you deposit after 5th of the month, you won't be earning any interest on such additional amount.
As regards withdrawal from the account is concerned; it is permitted any time after the expiry of 5 years from the end of the year in which initial investment (subscription) to the account is made. However, your withdrawal will be restricted to 50% of the amount which stood to the credit of your account in the immediate 4th year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower. And in case if your term of 15 year is over, you can withdraw the entire amount together with the interest accrued till the last day of the month, preceding the month in which application for withdrawal is made.
After your term of 15 years is over if you wish to renew your account, you can do so for a period of another 5 years at the rate of interest prevailing then, without having the compulsion of putting any further deposits in case of extension. The withdrawal in case of extended accounts is permissible once in every financial year. But the total withdrawal should not exceed 60% of the balance accumulated to the account at the commencement of the extension period (of 5 years).
In case you wish to invest in the name of HUF, you cannot do so. The Government has discouraged HUFs from taking advantage of a scheme whose objective is to create retirement nest egg for resident individuals. Earlier an 'HUF' could open a PPF account and save tax on the deduction, which has been stopped with effect from May 2005. However, existing PPF accounts of HUFs will continue to operate normally until maturity, but cannot be extended beyond maturity, and no new HUF PPF accounts can be opened.
Deduction: The contributions which you make to the accounts mentioned above, would be eligible for tax benefit but subject to the maximum eligible amount of Rs 1,50,000 p.a. as available under Section 80C of the Income Tax Act, 1961.
- National Savings Certificate (NSC):
The NSC is also a scheme floated by the Government of India, where one can invest in through his / her nearest post office (as the scheme is available only with India Post). The certificates can be made in your own name, jointly by two adults, or even by a minor (through the guardian), and has a tenure of 5 years or 10 years.
The minimum amount which you can invest is Rs 100, with no maximum limit to the same. NSC is available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. So, depending on the amount which you wish to invest, you can opt for the denominations. Thus for example if you want to invest Rs 50,000; five certificates of Rs 10,000 each can be opted for.
NSC maturing in 5 years offers interest @ 8.5% p.a. compounded half-yearly whereas NSC maturing in 10 years offers interest @ 8.8% p.a. compounded half-yearly, thus giving you an effective interest rate of 8.68% p.a. and 8.99% p.a. The interest income accrues annually and is reinvested further in the scheme till maturity (i.e. 5 or 10 years) or until the date of premature withdrawals.
Premature withdrawals are permitted only in specific circumstances such as death of the holder.
Deduction: Your investment in NSC is eligible for a deduction of upto Rs 1,50,000 p.a. under Section 80C of the Income Tax Act, 1961. Furthermore, the accrued interest which is deemed to be reinvested in a financial year qualifies for deduction under Section 80C in the respective financial year. However, the interest income is chargeable to tax in the year in which it accrues. But in case if you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as applicable.
- Bank Deposits and Post Office Time Deposits:
The 5-Yr tax saving bank fixed deposits available with your bank is also eligible for a deduction under Section 80C and comes with a lock in period of 5 years. The minimum amount that you can invest is Rs 100 with an upper limit of Rs 1,50,000 in a financial year. The interest rates offered by banks under 5-Yr tax saving fixed deposits are currently in the range of 8.50% p.a. to 9.00% p.a. But if you are a senior citizen you get 0.25% to 0.50% more, depending on the bank you opt for. While some banks offer interest rates a notch above the other, care should be taken so as to opt for a tax saving fixed deposit with a bank that is saddled with lower Non-Performing Assets (NPAs) after provisioning. A higher net NPA ratio reflects bad quality of loans and hence you should be wary of investing in such banks.
The interest earned on 5-yr tax saving fixed deposits is subject to tax deduction at source. Nonetheless, you can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as applicable for not deducting tax at source.
Similarly 5 Yr Post Office Time Deposits (POTDs) also offer you a tax benefit under Section 80C. You can open the account either in single name or jointly or even in the name of a minor (through a guardian) who has attained the age of 10.
The minimum investment amount is Rs 200, and there isn't any upper limit. However, similar to other tax saving instruments, the investment amount over Rs 1,50,000 will not be eligible for any tax benefit.
A 5-Yr POTD earns a return of 8.5% p.a. (compounded quarterly) but paid annually. Hence, say if you deposit an amount of Rs 10,000, the interest income which you will fetch, would approximately be Rs 867 p.a. As regards premature withdrawals are concerned, they are permitted only after 1 year from the date of deposit and interest on such deposits shall be calculated at the rate, which shall be 1% less than the rate specified for a period of 5-Year deposit.
Deduction: Your investment in both these schemes is eligible for a deduction of upto Rs 1,50,000 p.a. under Section 80C. But as mentioned above, the interest earned on your investments will be taxable.
- Senior Citizens Savings Scheme (SCSS):
Well, the SCSS is an effort made by the Government of India for the empowerment and financial security of senior citizens. So, in case if you are over 60 years of age, you are eligible to invest in this scheme. Moreover, if you have attained 55 years of age and have retired under a voluntary retirement scheme; then too you are eligible to enjoy the benefits of this scheme.
In order to avail the benefits of this scheme, you are required to open a SCSS account (either in a single name, or jointly along with your spouse) at your nearest post office or any nationalised bank. You can do a onetime deposit under this scheme subject to the minimum investment amount of Rs 1,000 and a maximum of Rs 15,00,000. The maturity period provided for this scheme is 5 years offering a rate of interest of 9.20% p.a. payable on a quarterly basis (i.e. on March 31, June 30, September 30 and December 31) every year from the date of deposit.
Premature withdrawals are permitted only after one year from the date of opening the account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be deducted. And in case if you withdraw after 2 years, 1.0% of the balance amount is deducted.
Deduction: Your investments upto Rs 1,50,000 in SCSS are entitled for a deduction under Section 80C. However, the interest earned by you would be subject to tax deduction at source. But in case if you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-H (for general) or Form 15-G (for senior citizens) as applicable.
- Non-Unit Linked Life Insurance Plans:
Life Insurance plans can be broadly classified as "pure term life insurance plans" and "investment-cum-life insurance plans".
Pure term life insurance plans are authentic in nature, as they cater to the need of only protection and not investment. Hence such plans offer a high life insurance coverage at low premiums. Generally the term insurance plans offer a policy term of 10, 15, 20, 25 or 30 years.
Investment-cum-life insurance plans on the other hand, as the name suggest offer you an investment option along with insurance option. But here your insurance coverage is far lesser, than the one provided under pure term insurance plans. So, you pay a high premium, which gets invested, but insurance coverage on the other hand is meagre. Such insurance plans can be offered in various forms such as ULIPs, endowment plans, money back plans, pension plans etc.
At PersonalFN we think that while you are considering your insurance needs, you should ideally look at only pure term life insurance plans, thus keeping your insurance needs separate from investment needs.
Deduction: Over here too the premium which you pay for such non-unit linked life insurance plans would be eligible for tax benefit, subject to the maximum eligible amount of Rs 1,50,000 p.a. as available under Section 80C. Moreover, a positive point is that at maturity the amount, which you or your beneficiary would receive, is exempt (tax free) as per the provisions of Section 10(10D) of the Income Tax Act, 1961.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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