By E R Ashok Kumar,
CEO and co-founder, Scripbox
There are a number of options that help in saving taxes. Here is a brief outline of 11 tax-saving options that also help in growing your wealth.
1. ELSS Tax Saving Mutual Funds
These are a type of mutual funds that invest in equity or stocks. ELSS funds can deliver returns ranging between 14 and 16% over the long term. Although this return is not guaranteed, historical data indicates that these returns are achievable over the long term. ELSS funds have a lock-in period of 3 years – the lowest amongst the options available – and the return is tax-free.
2. Public Provident Fund
This is a suitable option for those who are looking for fixed returns. They earn interest at a rate announced every quarter – currently 7.8%. The duration of a PPF account is 15 years and is extendable by 5 years at a time. Money cannot be withdrawn from a PPF account except under specified conditions but not before 5 years.
3. 5 Year Bank FDs
These offer slightly higher interest rates compared to normal FDs (0.25-0.5% higher) but have no liquidity as premature withdrawal is not possible. The interest earned on a 5-year bank FD is fully-taxable. Taxes are payable on a yearly basis for the interest earned in that period.
4. National Savings Certificate (NSC)
The current rate of interest is 7.8% for 5-year lock-in NSCs. The interest thus generated is fully taxable. However, one key difference here is that the interest amount is not paid out to the investor. Instead, it is re-invested in NSC and therefore can be considered as investment for the subsequent year. NSCs are thus a complex instrument.
5. Life Insurance Premium
This has been the default tax saving option for years. However, over the last few years, many informed investors have realized that there are shortcomings in choosing this option for tax-saving purposes. While life insurance has its benefits, it is not an ideal way to save taxes and grow wealth at the same time.
6. National Pension Scheme
This is similar to investing in mutual funds. It offers safe, moderate and risky options and returns are not guaranteed. The investor can only withdraw on reaching the age of 60 and the corpus amount must necessarily be invested in an annuity. The withdrawals are also taxable.
7. Pension Funds
These come in two variants- deferred annuity and immediate annuity. Pension funds are unpopular because of the low returns that they give.
8. Senior citizens savings scheme
This can only be opened by people who are above 60 years old. It comes with a maximum cap of Rs. 15 lakhs and a lock-in period of 5 years. One may withdraw the money before that subject to penalties.
9. EPF (Employee Provident Fund)
This is not optional for salaried employees. A lot of people forget that the amount contributed to EPF is also eligible for tax deduction. One can withdraw EPF when changing jobs. However, the accrued amount will be taxed as other income. If one withdraws EPF after 5 years, no taxes are applicable. The interest rate varies very year.
10. Tuition Fees for Children
Tuition fees for up to two children can be exempt from tax. This covers tuition fees only and not development fees or donations.
11. Home Loan Principal Repayment
Tax exemption is allowed for the repayment made towards home loan principal. The interest component is not eligible for tax benefits.
To conclude, it becomes evident that for those looking to save tax, there are ample avenues. The important question to ask is- does it also offer returns that beat inflation? In light of all the pro and cons, ELSS is among the best options for saving tax.