In starting of year 2013, it will only be wise to start the new year with wise investment. And what better if these investment options can also save some income tax for us. Lets discuss such top options with dual benefits of investment and tax savings.
Investment Options under section 80C giving Tax Benefits:
1) Public Provident Fund (PPF)
2) Employee Provident Fund (EPF)
3) National Savings Certificate (NSC)
4) Tax Saving Bank Fixed Deposit (TSBFD)
5) Senior Citizens Savings Scheme (SCSS)
6) Equity Linked Savings scheme (ELSS)
7) Life Insurance (LIP)
Section 80C is the most used income tax savings investment options by a common man. It will not be wrong to say that almost all Indians does income tax savings under section 80C.
| PPF | It has double benefits. While Investing an individual gets income tax deductions and upon maturity even interest is also non-taxable. Interest that can be earned on PPF is a decent 8% per annum with 15 years lock in period. There is one limitation that one cannot invest more than Rs 5833.33/month (Rs 70,000/year) in PPF. Investing Rs 5833.33 for 15 years @ 8% p.a. will accumulate Rs 20.5 lakhs for you. |
| EPF | I consider this as the best investment option. 12% of basic salary of an individual goes in EPF. This 12% also accounts for income tax deduction. Same 12% is also contributed by the company towards EPF. A person can also increase its self contribution to EPF beyond 12%. This increased contribution will also be liable for income tax deduction subjected to maximum of Rs 1.0 lakhs (under s/c 80C). EPF can be drawn by the employee after retirement from job. Interest earned under EPF is also non-taxable. Interest rates of EPF generally varies between 8% to 9.5% p.a |
| NSC | Interest that can be earned on NSC is 8% per annum. But interest earned on NSC is taxable. But the advantage of NSC is that the lock period is much shorter, upto 6 years only. There is another benefit of NSC, the interest rate is compounded halfyearly. On one NSC one can take tax deduction only once. So in order to get tax benefits of NSC, one has to buy new NSC each year. |
| TSBFD | The locking period for income tax savings bank fixed deposits are minimum five years. The interest of bank fixed deposits are compounded quarterly. But the disadvantage is (like NSC) the earned interest is taxable. The interest that can be earned on bank fixed deposits are varying between 7% to 10% (at times even higher). |
| SCSS | Person above sixty years of age are deemed as senior citizens. A person who has taken voluntary retirement at age of fifty five years will also fall in this category. Interest that can be earned under this scheme is a healthy 9% per annum compounded quarterly. |
Apart from these there are equity linked savings scheme which can also save income tax for an individual. The benefits of such scheme must be calculated as sun of capital gains plus income tax savings. Important of such schemes is that they are both equity schemes but still gives benefits of tax savings liked fixed income schemes.
| ELSS | These are nothing but equity linked mutual fund schemes but with a lock in period of 3 years. In last 10 years a ELSS has give capital appreciation to investors at rate of 22% per annum in addition to tax advantage. |
| LIP | These are life insurance scheme The premium paid each year towards life insurance attracts income tax deduction. |
Conclusion
If one wants to take advantage of both investment and savings in form of income tax deduction under section 80C, then the above options are most suitable. Every salaried person must take cent per cent advantage of section 80C deductions. The best way to maximize the benefits is by choosing either of the above linked investment option. If you take my advice the EPF is done automatically if you are a service class person. Apart from EPF, I think everyone must has LIP and ELSS. ELSS must not used for three-lock-in-periods only, but its period must be extended to minimum seven years.
I think, PPF limit is Rs 1Lakh and the interest is 8.8%