One of the most common financial mistakes people commit is choosing the wrong tax-saving instrument. While there are scores of tax-saving avenues in the market, good financial planning involves selecting those that are best suited to your needs so that they not only reduce the tax burden, but also benefit you financially.
Public Provident Fund: PPF is one of the most popular tax-saving instruments. Now that PPF interest rates have been linked to bond yields in the secondary market, they offer returns at par with other instruments. While the maturity amount as well as interest earned on PPF are tax-free, the ease of opening an account and liquidity are a plus. PPF is especially suitable for low-risk investors.
Equity-Linked Savings Schemes: ELSS are a more risky proposition than PPF. With good returns and a tax-free status, ELSS play a crucial role in effective tax management. They have a three-year lock-in, which is among the smallest amid all instruments covered under Section 80C of the Income-Tax Act. Being an equity-linked fund, there is, however, no guarantee of returns as they mirror the stock-markets and the general financial sentiment.
Unit-Linked Insurance Plans: Ulips are market-linked insurance schemes that offer tax-saving options under Section 80C. Ulips offer advantages of life cover with investment in equity and debt markets, along with serving as a tax-saving instrument. The downside is higher premiums and discontinuation of policy if one takes a premium holiday. One can opt for a debt-market-linked Ulip and move to equity during a bull run.
Voluntary PF: Voluntary Provident Fund (VPF) is a lesser known tax-saving instrument, but quite as useful. Designed as an extension of the Employees Provident Fund, a voluntary PF account can be created with the help of an employer in each financial year. Once initiated, the employer will deduct 12% of the basic and dearness allowance from the salary and transfer it to the VPF account. The employer would also need to contribute 12% funds from his side to the EPF account. But VPF accounts offer very limited liquidity and funds cannot be withdrawn until one retires or quits the job.
Senior Citizen Savings Scheme: SCSS offer 9% annual returns on deposits. Only people above the age of 60 can opt for this scheme. Though one can open multiple saving scheme accounts, the total amount of investment cannot exceed R15 lakh. SCSS qualifies for deduction under Section 80C, but the interest earned is taxable.
National Pension Scheme: An ideal investment vehicle for retirement planning, it offers tax-saving under Section 80C. But the deductions are allowed only for contributions to a Tier-I NPS account with a minimum annual investment of Rs 6,000. Also, no premature withdrawals are allowed.
National Savings Certificates and Bank FDs: NSC and bank FDs are widely used financial instruments. Deposits, however, are not tax-free, as is widely believed. Government regulations offer deduction of up to Rs 10,000 on interest earned in the savings bank account.
Life Insurance Policies: The premium paid for a policy covering an individual and his/her immediate family members is deductible up to Rs 1 lakh.
Rajiv Gandhi Equity Savings Scheme: RGESS offers tax savings for a year for first-time investors. They can claim a deduction of 50% of the invested amount. The maximum investment amount is fixed at Rs 50,000 with a maximum deduction of Rs 25,000. This deduction is over and above the Rs 1 lakh limit available under Section 80C.
Pension Plans: Pension plans initiated by life insurance companies also provide tax deductions under Section 80C since 2013. The downside is high fund-management charges.
The writer is CEO, BankBazaar.com