Tax Saving Investments

Introduction-

The pleasure of receiving money may get reduced when a substantial part of money is paid by way of taxes. To maintain the pleasure, the money could better be invested in some tax saving schemes which will not only save taxes but will also provide returns. Let us take a look at some of them-

1. Equity Linked Saving Scheme (ELSS)

Meaning –

ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. Investors can also choose to invest a lump sum of funds at a go, or invest on a monthly basis in equity oriented assets by way of SIPs (Systematic Investment Plans). The interest rate under ELSS are 12% to 15% (expected).

There are three options for investors who wish to put their money into ELSS. –

Growth Option:  Under the growth option, holders do not receive any benefits via dividends. Benefits will only be given to holders when the tenure of the ELSS is complete

Dividend Option: Under the dividend option, investors receive benefits in the form of dividends on a timely basis as opposed to a lumpsum figure at the end of the tenure.

Dividend Reinvestments Option: Under this option, a holder will have the option to return the dividends earned as doing so will mean that value is added to the NAV.

Particulars	Details
Investment amount	Most ELSS schemes allow investors to start investing with as low as ₹500
Lock in period	These schemes have a mandatory lock-in period of 3 years
Deduction	ELSS funds are also called tax saving schemes since they offer tax exemption of up to ₹ 150,000 under Section 80C of the Income Tax Act

2. National Pension Scheme (NPS)

Meaning –

The NPS or National Pension System is a voluntary retirement scheme which is available to all Indian citizens (resident or non-resident) between 18 and 65 years old. It is different from EPF which is a mandatory savings towards retirement for salaried whereas NPS is voluntary.

It has Tier I and Tier II accounts. The Tier I account is the retirement account where you cannot withdraw contributions till you reach the age of 60. In Tier II account you can take out money anytime. The Tier I account is mandatory, In contrast, Tier II can be opened only when one already has a Tier I account.

When you reach the maturity age, which is 60 years, you can withdraw the entire corpus from Tier I, of which only 60% is exempt from tax as with the remaining 40% gets invested in annuity.  An annuity is treated as income and added to your other income sources and taxed as per the tax slab you fall in. Likewise, the entire corpus under Tier II is fully taxable as it is treated as income. NPS allows partial withdrawal upto 25% of the contributions. The interest rates are 8% to 10% (expected).

Particulars	Details
Investment amount	The initial minimum contribution is ₹ 500 under the Tier I account and ₹ 1,000 for Tier II at the time of registration. Subsequent contributions, as well as frequency, could vary, but one needs to make an annual minimum ₹ 1,000 contribution annually under Tier I and ₹ 250 under Tier II.
Lock in period	The funds remain invested till retirement.
Deduction	Individual taxpayers can claim deduction on contributions under Tier I NPS up to ₹ 150000 under Section 80C. Further, an additional deduction can be claimed for investment up to ₹ 50000 in Tier I account under Section 80CCD (1B) over and above the ₹ 150000 deduction under Section 80C. However, contributions to Tier II do not provide any tax benefits.

3. Public Provident Fund (PPF)

Public Provident Fund (PPF) scheme is a long term investment option which can be availed by any person whether employed or self employed. One can fully withdraw the PPF account balance only upon maturity i.e. after the completion of 15 years.  The scheme also permits partial withdrawals from year 7 i.e. on completing 6 years. The last recorded rate of interest under PPF is 8.1%.

Particulars	Details
Investment amount	The amount to be invested ranges from ₹ 500 to ₹ 150000. Amount can be deposited not more than 12 times in a year and not more than 2 times in a month
Lock in period	PPF account is opened for a period of 15 years. However on expiry account can be extended to a period of 5 years at a time. It can be extended any number of times for a period of 5 years each.
Deduction	Such investments are eligible for deduction under sec 80C of Income Tax Act.

4. National Saving Certificate (NSC)

National Savings Certificate (NSC) is a tax saving investment with the aim to encourage small or medium investors backed by Central Government. The NSC scheme is available at all Post Offices.  NSC comes with a fixed maturity period of five years. The certificates earn a fixed interest, which is currently at a rate of 6.8% per annum. The interest rates are revised every quarter by government. Since it is government backed scheme, the risk profile is low.

Particulars	Details
Investment amount	You can invest as low as ₹ 1,000 (or multiples of ₹ 100) as an initial investment, and increase the amount when feasible.
Lock in period	The amount remains invested for a period of 5 years.
Deduction	NSC is eligible for deduction under sec 80C upto 150000.

5. Fixed Deposit (FD)

Fixed Deposits or FDs are one of the most popular investment products in India. They are highly preferred by individuals who have low to no risk appetite and want guaranteed returns on their investments. The returns does not depend on market fluctuations, hence it is suitable for those who requires fixed rate of income after loin period. Apart from guaranteed returns, fixed deposits offer another benefit to investors – credit cards against FD, loan against FD. Such cards are secured credit cards and are a good option for those who do not have a good credit score or are new to credit. Interest rates on FD is 7% approximately.

Particulars	Details
Investment amount	Minimum investment amount in FD can be 1000
Lock in period	The amount remains invested for a period of 5 years.
Deduction	Tax saver FD’s can be claimed as deduction under sec 80C. Further interest on FD’s are liable for TDS under sec 194A if the amount exceeds 40000 and 50000 in case of senior citizens

6. Other schemes

There are some other schemes which are applicable for some specific category of persons. Let us take a brief-

Scheme	Details
Sukanya Samriddhi Yojana (SSY)	This is government-backed small savings scheme for the benefit of girl child which can be opened by the parents of a girl child below the age of 10. A Sukanya Samriddhi Account has a tenure of 21 years or until the girl child marries after the age of 18. Minimum deposit in such account is ₹ 250 and Maximum deposit    ₹ 150000 in a financial year. Deposit qualifies for deduction under Sec.80-C of I.T.Act. Interest earned in the account is free from Income Tax under Section -10 of I.T.Act Interest rates for FY.21-22 are recorded at 7.6%p.a..
Senior Citizens Saving Scheme	This is government-backed small savings scheme for the benefit of senior citizens to ensure regular flow of income. The deposit made at the time of opening of the account shall be paid on or after the expiry of five years or after the expiry of eight years where the account was extended from the date of the opening of the account. opened with a minimum deposit of ₹1000 and maximum of ₹1500000. The investment qualifies for deduction upto ₹150000 under sec 80C of Income Tax. Currently interest rate are recorded at 7.4%p.a

Conclusion-

The above are some of the schemes which can save taxes as well as provide returns. The selection of scheme will depend on risk appetite, age of the investor, capacity of investment, required rate of return, withdrawal options, etc. So start investing at an early stage to earn higher returns and to secure future.