Analysis of various Tax Saving Investments

The financial year is coming to an end and so must determine where to invest so as to get optimum return and tax benefits. Even though the primary objective is to save taxes you also want that your investments earn good returns. This article is an attempt to analyze the various tax saving investments available and the annual returns that it earns.

1.    EPF

Employee provident fund (EPF) is the most common tax saving investment. Most of the employees contribute to EPF. EPF investment is eligible for deduction up to Rs.1 lakh.

Return on investment: 8.75% p.a.

Point to remember: You should note down the yearly contribution to your EPF account so that you know how much more is to be invested for claiming the Rs.1 lakh exemption under section 80C.

2.    PPF

You can invest up to Rs.1 lakh in Public provident fund (PPF) and the entire amount can be claimed as deduction under section 80C. Even the interest received and the maturity amount are totally exempt from tax. Tenure of PPF investment is 15 years.

Return on investment: 8.7% p.a.

Point to remember: PPF interest is calculated by 5^th of every month. So, if you want to receive interest for the entire month, invest before that date.

3.    NSC

Investment in National Savings Certificate (NSC) is also tax deductible under section 80C subject to the maximum limit of Rs.1 lakh. The tenure of NSC is 5 year or 10 year and you can invest in either of the two.

Return on investment: 8.5% p.a. for 5 year investment & 8.8% p.a. for 10 years investment.

Point to remember: The entire interest on NSC is received on maturity, but the yearly interest has to be declared every year in your income tax returns and tax has to be paid on it. Carefully evaluate the lock-in period and the taxability before opting for investment in NSC

4.    RGESS

RGESS (Rajiv Gandhi Equity Savings Scheme) is the latest tax saving option. It offers tax saving over and above 80C limit. This investment is available only to first time equity investors having income up to Rs.12 lakh p.a. The maximum that can be invested is Rs.50,000 and the tax deduction is up to Rs.25,000.

Return on investment: 10-12% p.a.

Point to remember: RGESS is not so easy to understand as the fixed deposit. For first time investors, it is advisable to invest in simple schemes rather than investing in the equity market.

5.    NPS

New pension system is considered one of the cheapest retirement products. The tax benefits on NPS are – 1) Own contribution under 80CCD (1) up to Rs.1 lakh p.a. and 2) Employer contribution under 80CCD (2) with no upper limit.

Return on investment: 8-12% p.a.

Point to remember: Those who are already investing in EPF should not consider investing in NPS if it is just for tax saving. Also note that it has an equity investment limit of 50%.

6.    Fixed deposits

Fixed deposits (FD’s) with investment tenure of 5 years of more are eligible for tax deduction under section 80C. It is preferred my many as it is simple to understand and is hassle free for investment.

Return on investment: 8.5-9.5% p.a.

Point to remember: To avail tax benefit on FD investment there is a lock-in period of 5 years. So you must evaluate your decision carefully before investing as your interest rate remains fixed for the entire tenure and you cannot take the benefit of if interest rates increase later on.

7.    ELSS

Equity Linked Savings Scheme are also deductible under the 80C limit. There is a lock-in period of 3 years and you cannot withdraw your money earlier. These are diversified equity mutual funds which also offer tax benefits.

Return on investment: 8-10% p.a.

Point to remember: It is better to avoid investing in ELSS if you don’t have knowledge about investment in mutual funds. Investing in ELSS without proper research can even erode your capital.

8.    SCSS

Senior citizens savings scheme is also a part of section 80C. It is available to senior citizens i.e. citizens above 60 years. This post office product has a maturity period of 5 years which can be further extended by 3 years after maturity.

Return on investment: 9% p.a.

Point to remember: You cannot withdraw from SCSS before 5 years and the only option is premature closure of the account after 3 years.

9.    Insurance

Life insurance and health insurance offer tax benefits under section 80C and section 80D respectively. The premium amount of all life insurance policies can be claimed under 80C while premium paid for health insurance is to be claimed under 80D. The maximum deduction for Health Insurance premium is Rs.15,000 p.a. for citizen below 60 years and Rs.20,000 for senior citizen. Premium for health insurance of your parents can be claimed over and above this limit.

Return on investment: 5-6% p.a.

Point to remember: For claiming tax benefit under insurance there is a condition that the premium amount should not exceed 10% of the sum assured to be eligible for this deduction.  Avoid investing in life insurance policies which mix insurance and investment as the higher charges and other restrictions will result in lower returns on investment.

Conclusion

These various tax saving instruments are available. But before choosing amongst them, remember that these are also long term investments and so should optimize your tax saving and return on investment.