Detailed Analysis of Tax Saving Investment
As the Financial Year 2021 is about to end and as we all know that 31st March is the last date for Tax-Saving Investments under section 80C, Investors rush for such investments which help them save taxes. For investors looking out for such last-minute Tax Saving Investments Option, let’s take a look at different investment options.
From Tax Saving Point of view, a person makes investments under section 80C in 2 Asset Classes i.e., Debt and Equity. Section 80C of Income Tax Act provides the amount of eligible investment or expenditure as specified is fully allowed for deduction subject to the limit of Rs 1.5 lakh. Government does not provide any benefit u/s 80C for any other asset class like Real Estate, Gold, etc.Now, among the 2 options of Tax Saving Investment, where should a person invest?
Answer to this question is simple i.e., Asset Allocation.
- If the person wants more equity weightage in his asset allocation, then he/she should proceed with Equity-type investments.
- Else, if a person wants more debt in the asset allocation, he/she should proceed with Debt type investments.
Detailed Review of Tax Saving Investment
Debt Investments u/s 80C:
i) Employee Provident Fund (EPF):
- One of the most attractive investment options under this type is Employee Provident Fund (EPF).
- If your company provides EPF facility, then the person is automatically fulfilling certain portion of the tax benefit of Rs. 1,50,000 u/s 80 c.
- EPF provides desirable interest rate of 8.50% which is much better than FDs.
- Although, EPF has lock-in period of 5 years, but it is a good option.
ii) Voluntary Provident Fund (VPF):
- (VPF) is the voluntary fund contribution from the employee towards his provident fund account. It is not compulsory; it is fully voluntary decision of the individual to opt for VPF.
- Benefit of VPF can only be availed by salaried employees.
- VPF has a very long lock-in period, an individual will receive the sum amount at the time of his/her retirement only.
- It provides interest rate of 8.5%, which is similar to EPF.
- Selecting this investment option can be best suited for individuals whose retirement is drawing closer.
iii) Public Provident Fund:
- PPF is another lucrative investment option available for investors.
- Currently, PPF is providing interest rate of 7.1% and is revised on quarterly basis.
- Minimum tenure for investment in PPF is 15 years, which can also be extended for 5 more years.
- Since it is a Government backed scheme, it is considered as a safe scheme.
- Main feature of this scheme is that it is an EEE scheme which means Deposit Made, Interest Received and Maturity Proceeds are Exempted.
iv) Senior Citizen Saving Schemes:
- This scheme is basically for senior citizens (aged above 60 years) in India.
- Currently, this scheme is yielding more interest rate than PPF i.e., 7.4%.
- Also, the maturity period of this scheme is also quite low i.e., years which can further be extended by 3 years.
- Interest Received from Senior Citizen Scheme is fully taxable.
- Apart from this if interest on this scheme exceeds Rs. 10,000 then TDS is deductible @ 10%.
v) Sukanya Samriddhi Yojana (SSY):
- If an individual is blessed with a daughter, then he/she should proceed with SSY scheme.
- SSY scheme offers captivating return of 7.6%.
- Typically, SSY account is opened in the name of a girl child. It can be opened by parent or legal guardian before the girl attains the age of 10 years.
- Tenue of this account, is when the girl achieves the age of 18 years.
- SSY schemes are beneficial for tax-saving investment as it offers more interest than PPF and is expected to provide in future also.
All the above-mentioned debt-type investments involve high lock-in period. Now we will go through other debt-type investments options which offers less lock-in period.
vi) Tax Saving Fixed Deposit:
- An individual can open a fixed deposit account with a lock-in period of 5 years.
- But, here, the interest rate varies between 5.3% to 6% which is the lowest interest rate among all other investment options.
- Moreover, the interest received is fully taxable. It is an EET (Exempt-Exempt-Taxable) Scheme.
vii) National Saving Certificate (NSC):
- NSC is a fixed income investment scheme which an individual can open by visiting to their nearby post offices.
- This scheme also comes with a minimum lock-in period of 5 years.
- Currently, interest rate on this scheme is hovering at 6.80%.
- NSC scheme is also similar to Tax saving fixed deposit as it is also an EET scheme, where interest received is fully taxable.
- For lower duration investment, individual should only proceed with NSC rather than Tax Saving FD, as it provides higher interest rate over the same period of time.
Equity Investments u/s 80C:
i) Equity-Linked Savings Scheme (ELSS):
- It is a Tax saving Mutual Fund. Investment in ELSS funds provides tax deduction upto Rs. 1,50,000 under section 80C.
- ELSS have the lowest lock-in period of only 3 years.
- Under the taxability section, ELSS schemes are charged with Capital Gains @ 10% if the gains from this scheme exceeds Rs. 1 Lakh.
ii) Unit-Linked Investment Plans (ULIPs):
- It is another equity investment instrument where an individual can seek deduction u/s 80C.
- Here, the minimum tenure is 5 years.
What to choose- ELSS or ULIP?
- Between the above 2 equity investments ELSS is a better option.
- Also, the returns in ULIPs are low as compared to ELSS, since have some insurance cover as well.
- ULIPs have larger lock-in period than Tax Saving Mutual Funds.
iii) National Pension Scheme (NPS):
- NPS is a pension programme and a retirement planning option for individual.
- Sum assured in NPS will only mature at the time of retirement.
- Variety of options are available under this scheme for investments.
- Investment in NPS should be for long-term.
- Also, NPS involves a bit complexity and thereby for Section 80C, one should not proceed with this scheme.
- For those individuals who fall under 30% tax bracket, they can invest Rs. 50,000 in NPS for taking benefit of Section 80CCD.
All above investments options mentioned under the category- Debt & Equity instruments are some good options available for individuals to invest in them and help in tax saving. Individuals who have not made any investments u/s 80C should surely proceed with the above Tax Saving Investments options keeping in mind their Asset Allocation Strategy , Risk Profile and investment Time Horizon.