If the stock market’s sharp swings unnerve you, look beyond the equity-linked savings schemes (ELSS) to save your taxes. Although stock markets provide better returns over the long term, tax-saving can be more effective with fixed-income investments that qualify for tax deductions.
You don’t have to look too far for fixed income tax-saving options. The ubiquitous post office may not have the convenience of private bank or the computerised environment of a modern financial intermediary, but it is convenient for tax-saving options. Post office agents do the hard work of handling your account, thereby making it easier for you to invest there.
The Evergreen PPF
Among the first tax-saving instruments that you should seek is the Public Provident Fund (PPF) account. This account also doubles up as your retirement fund if you regularly invest in it as it has a long tenure of 15 years. Investors can deposit up to a maximum of Rs 70,000 per year and the investment qualifies for a deduction under Section 80C. This reduces your taxes effectively by around Rs 21,000 per annum. PPF pays an interest of 8 per cent p.a., once a year and the same is tax-free in the hands of investors. Besides, the benefits of compounding can see your corpus grow faster in the later years. Consider this, if you invest Rs 70,000 diligently every year for 15 years, your corpus will amount to a tidy Rs 20.52 lakh while you would have invested a sum of Rs 10.5 lakh.
| Small schemes, big tax savers|
The post office schemes help save your tax.
National Savings Scheme
Tenure: 6 years
Minimum Investment: Rs 500
Maximum Investment: No limit
Returns: Rs 1,000 grows to Rs 1,601 in six years (at approx. 8 per cent p.a.)
Tax Status: Tax breaks u/s 80C; gains taxable on maturity; no TDS
Public Provident Fund
Tenure: 15 years
Minimum Investment: Rs 500 p.a.
Maximum Investment: Rs 70,000 p.a.
Returns: 8 per cent p.a.
Pledge: Loan available from third year
Withdrawals: After seven years, subject to certain conditions
Tax Status: Tax breaks u/s 80C; interest income is tax-free
Tenure: 5 years
Minimum Investment: Varies between banks
Returns: 7-8 per cent p.a.
Tax Status: Tax breaks u/s 80C; subject to TDS every year
PPF accounts can be opened with post offices and certain PSU banks like the State Bank of India or State Bank of Mysore. Banks stipulate that there should be at least one transaction (deposit) in this account in a year and impose fines if this condition is not met. It is better to invest regularly to ensure a sufficient nest egg for the future. One can take loans against the corpus invested and it also offers partial withdrawal benefits after seven years.
The other post office scheme that qualifies under Section 80C of the Income Tax Act in the post office is the National Savings Certificate (NSC) scheme. But unlike PPF, the interest accrued is not tax-free. There’s no limit on the amount you can invest and the interest rate works out to around 8 per cent p.a. If you invest Rs 10,000 in NSC, it will turn into Rs 16,010 implying an effective yield of 8.15 per cent p.a. Besides, the interest accrued on the scheme every year is also eligible for tax deductions under Section 80C.
There are bank deposits, too, with a five-year lock-in that help save taxes. Only deposits under the Bank Term Deposit Scheme, 2006, qualify for a tax deduction under Section 80C, subject to a maximum of Rs 1 lakh. These tax-saving deposits currently yield around 9 per cent interest, and for the senior citizens, banks offer 50 basis points more. However, these rates can change every year depending on market conditions. At 9 per cent, these rates are attractive compared to the NSC which has a similar lock-in. Usually, banks make announcements after January on the interest rates applicable. Check for banks that offer the best rates and the frequency with which money is compounded. The more frequent the compounding, the greater the returns.
Save Tax with Insurance
Insurance also doubles up as your tax reducer, though financial planners advise against using insurance for saving taxes. They say that insurance should cover life and protect the financial interest of your loved ones. However, the law allows you to tax deductions under Section 80C on the insurance premium paid.
Traditional money-back life insurance policies can classify as a fixed income investment. Moneyback policies offer pre-determined sums of money at regular intervals. The returns range from 6-8 per cent and are not taxable, much, like PPF. Endowment policies also generate similar returns, but these really depend on the track record of the insurance company. Generally, traditional policies offer safety and returns as the investments are spread over a long tenure. Pension funds also follow the same principle.
Tax Breaks on a House
A house can also provide tax rebates, provided you have financed it from a bank. Buyers are allowed a rebate of Rs 1 lakh on principal repayment, which qualifies under Section 80C and also a deduction on the interest repayment of up to Rs 1.5 lakh. This is among the best tax savers available as buyers can avail up to Rs 2.5 lakh deductions in income in the initial years. “A loan of Rs 22-25 lakh at an interest rate of around 9 per cent should help one max this incentive,” says Mariam Mathew, Associate Vice President and National Sales Manager (Private Client Group), DBS Cholamandalam Wealth Management. “If I were to rank the options, I would rate housing loans as the best option.”
The Medical Edge
An often overlooked, but crucial tax deduction is the deduction on medical premium paid. A mediclaim policy can come in handy as it provides for expenses incurred for hospitalisation in India to treat illnesses specified in the policy. Under Section 80D, on a premium paid of Rs 10,000 (Rs 15,000 in the case of senior citizens), individuals can save taxes up to Rs 3,060 (including surcharge) if you are assessed at the upper end of the tax bracket. One can also pay this premium towards health insurance of spouse, dependent parents and children. Although the deduction may appear small, it effectively brings down the cost of medical insurance and helps cover essential health costs economically.
It is true that buying a house on finance saves substantial taxes, but don’t ignore the smaller ones such as medical insurance. Also, it’s best to make use of tax deductions under Section 80C as an investment of Rs 1 lakh save taxes of Rs 30,000 (excluding surcharge) for taxpayers in the 30 per cent tax bracket. This not only cuts taxes, but also inculcates the savings habit.