There are many options to save tax, before you make a choice, go through this post. We have rated the most common investments under section 80C on five basic parameters: returns, safety, flexibility, liquidity and taxability.
PUBLIC PROVIDENT FUND
The PPF is our top choice, since it covers almost all the parameters. This small tax saving scheme has always been a favourite tax saving scheme, also PPF returns are in line with the prevailing market rates. This year, PPF will return 8.7%, 25 basis points above the average benchmark yield in the previous financial year. Also the PPF offers a lot of investor flexibility; you can open an account in a post office branch or a bank. Some private banks allow online investments in the PPF accounts with them. The maximum investment of 1 lakh/year can be done as a lump sum or any working day of year. Just make sure you invest the minimum Rs.500 in your PPF account in a year.
The PPF also offers liquidity to the investor. If you need money, you can withdraw after the fifth year, but withdrawals cannot exceed 50% of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. Also only one withdrawal is allowed in a financial year. You can also take loan against PPF, but it cannot exceed 25% of the balance in preceding year. The loan is charged at 2% till 36 months, and 6% for longer tenures.
Equity linked saving schemes (ELSS) can generate good returns for investors over the long term. In the past five years, this category has given average returns of 17.5%. But this high potential comes with high risk. There is no guarantee that your investment will generate positive returns after 3 year lock in period. Though the ELSS funds invest in equities, they are different from other open-ended diversified equity funds. Due to the lock in period, the equity fund manager does not have to worry about redemption pressure from investors. This gives him freedom to invest in shares as per his conviction and hold them for longer periods. The minimum investment is also very low as 500 rs in an ELSS scheme.
NSCs and BANK FD
Section 80TTA gives a deduction of up to 10000rs on interest earned in the savings bank account, not on FDs and recurring deposit. The interest earned on deposit is fully taxable at the normal tax rate applicable to you. So don’t get misled by the high interest rates offered on the 5 year bank fixed deposits. In the 20% and 30% bracket, it is not as attractive as the yield of tax frees PPF.
The interest on NSCs is also taxable but very few tax payers include in their returns. However with the integration of tax records, a tax payer may not be able to escape the tax net easily.
LIFE INSURANCE POLICIES
Money back and endowment plans score low on the flexibility scale. Once you buy a policy, you are supposed to keep paying the premium for the rest of the term. This can be a problem if you took the policy only to save tax. However these policies are not liquid as they appear. You can easily get a loan against your endowment policy from the LIC. The terms are quite lenient and repayment can be done at your convenience. As for the tax benefit, there are simpler and more cost effective ways to save tax, such as 5 year bank FDs and NSCs. If the taxability of the income worries you, go for the PPF.