CA Rohit R Sharma
As the end of financial year draws near, many of my friends who were least bothered about tax saving investments throughout the year, starts hunting down options to park their surplus funds and consequently save up on taxes. Being the Good Samaritan, I chalked out some of the most advisable alternatives available under section 80C to save tax. These options help in not only saving taxes, but also let your money grow.
ELSS falls under the category of E-E-E i.e.
At no point of time a person is required to pay taxes on such investments. However as per Finance Act 2018 LTCG on ELSS (equity oriented) in Excess of Rs 1 lakh is taxable @ 10% without indexation. ELSS is an attractive tax saving option offered by the mutual fund houses. The amount invested in ELSS by you is used by mutual funds to invest in equity shares market. Not only is the return on investments high, but the income generated is tax free and the investor is also free to decide the tenure and amount of investment.
ELSS carries a compulsory lock-in period of 3 years, the least of all tax saving options. Investors are free to exit the funds after the initial lock-in period or they can continue investing if they find the investment beneficial to them. Similar to a mutual fund advertisement, ELSS is subject to market risks and it is essential that you invest in the right fund.
PPF is one of the most preferred choices for investments under section 80C, since it carries zero or nominal risk i.e. there is full capital safety plus it also provides decent returns if not very attractive. The prevailing interest rate on PPF is 7.6 %.
PPF Scheme also falls under the EEE category of investment. The minimum amount of investment under PPF is RS.500/- whereas the maximum amount that can be invested is Rs. 1,50,000. It carries a lock in period of 15 years which can be further extended in blocks of 5 years.
Investors can avail loan facility against PPF deposits from the 3rd financial year up to the end of 5th financial year. The investor can also make one withdrawal every year, beginning from the 7th financial year, of an amount that does not exceed 50% of the PPF account balance:
a. At the end of the fourth year immediately preceding the year of withdrawal, or
b. At the end of the preceding year, whichever is lower.
3. Tax Free Infra Bonds:
Infrastructure bonds are recommended for people who fall under the higher tax bracket. They offer attractive returns as compared to investments made in Bank FDs. These bonds carry a coupon rate of approximately 7% to 7.5 % with tenure ranging from 10-20 years. They do not carry any lock-in period of investment.
SCSS is considered to be the best investment option for a senior citizen as the return offered in SCSS is 8.30%. The advantage of investing in a SCSS is that the investor receives interest on a quarterly basis, thereby allowing senior citizens to overcome their financial crunches. It also offers liquidity to senior citizens in the form of premature withdrawals. However the interest earned in SCSS is taxable.
Many investors misinterpret insurance to be an investment option rather than an insurance scheme. They invest their surplus funds in insurance scheme in order to avail the benefit of insurance as well as investment. But at the end of the day, the return from an insurance policy is merely 5% to 6% Investors should understand that both investment and insurance are absolutely necessary but the two should never be clubbed together.
The most suitable and pure form of insurance is the term plan, wherein the investor covers up his crisis by choosing a suitable insurance policy and paying a small amount as his premium. The amount thus saved by him by not investing in a traditional plan can be invested by him in any of the above mentioned options in order to gain better return on his investments.
Though section 80C gives multiple options, I have personally chosen only the above 5 for investing so as to not only save tax, but to also earn a better rate of return while making flexible investments. One should note that for tax purposes, the maximum benefit that can be claimed by investing in the above is Rs. 1,50,000.
The Author is a Chartered Accountant and can be reached at email@example.com or 9920930544.
Please Note it is always advised to engage a Financial Planner for a better long term planning before making any Financial Investments as every person has different financial needs to fulfill and no common formula can be employed unanimously for all.
(Republished With Amendments)