Tax Saving Options

As the time comes for declaring your investments and filing your income tax returns, you might be in a state of confusion about where to invest so that you get the maximum rebate. There is no shortage of advice on things like fixed deposits, tax deductions, and insurance policies from friends, family, and colleagues. But that advice might be generic and may not give you the maximum benefits. You might be wondering how to juggle different modes of investment, which options are risky, and which are safe.

mymoneykarma is your friend in need. After carefully assessing several tax saving options for 2019 by their returns, risks involved, costs, transparency, and taxability of income, we’ve come up with a list of the top ten tax-saving opportunities designed to cater to your financial needs. You can invest in a combination of different options to get maximum benefits.

ELSS funds

Equity-linked savings schemes are excellent ways of saving your taxes under Section 80C. You can invest as much as you want, but any excess amount over Rs.1.5 lakh will not let you avail of the tax benefits under Section 80C. ELSS funds are of two main types: growth funds and dividend funds. Growth funds are suitable for investors who are looking to invest for an extended period and receive the full value of their funds only at the time of redemption. Under dividend fund, investors receive tax-free payouts that they can reinvest as fresh investments.

Contrary to a popular myth, all ELSS funds aren’t necessarily risky. While some funds dedicate more to small- and mid-cap stocks, some others stick with stable large-cap stocks.  You must choose the one that best suits your risk appetite.

National Pension Scheme

The National Pension Scheme or NPS is a government-sponsored pension scheme launched in 2004. A subscriber can regularly contribute in a pension account during his/her professional life, withdraw some amount from a lump sum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

NPS can help save tax under different sections. You can claim contributions of up to Rs 1.5 lakh as deductions under Section 80C. There is a provision of an additional deduction of up to Rs 50,000 under Section 80CCD(1b). If the employer contributes up to 10% of one’s basic salary in the NPS, the amount cannot be taxable.

Public Provident Fund

Public Provident Fund (PPF) scheme is a popular long-term investment option offered by the Government of India. It provides a stable investment option with attractive rates of interest and other facilities such as loan, withdrawal, and extension of account.

PPF is an excellent option for the cautious investor because the interest is tax-free, giving the scheme a significant advantage over fixed deposits. PPF performs exceedingly well on safety, flexibility, and ease of investment.

Senior Citizens’ Saving Scheme

Investing in Senior Citizen's saving scheme is extremely beneficial for senior citizens in getting the most out of their tax deductions. It is an effective and long-term saving option that offers security and features of any government-sponsored investment scheme. These schemes are available at certified banks and post offices across India. Last year’s Budget has made the Senior Citizens’ Savings Scheme (SCSS) more attractive by offering senior citizens an additional Rs. 50,000 exemption on interest income. The total tax exemption for senior citizens is Rs. 3.5 lakhs.

Sukanya Samriddhi Yojana

For parents with daughters below 10 years of age, the Sukanya Samriddhi Yojana can be an excellent way to invest for their daughters. The interest rate of 8.5% is linked to the yield of government bonds and is subject to change every quarter. The Sukanya scheme offers a higher interest rate than PPF. There is an annual cap of Rs. 1.5 lakh on the investment. A parent can open accounts at any post office or designated banks with a minimum investment amount of Rs. 250. Any parent can open an account for their daughter. The account can be opened for at the most two girls, but the combined investment in the two accounts cannot exceed Rs. 1.5 lakh in a year, and the maturity proceeds have to be used for her education and marriage.

ULIPs

ULIP stands for unit-linked insurance plans. A ULIP contains both the elements of insurance and investment. The policyholder can either pay a monthly or annual premium. A small percentage of the premium goes toward life insurance, and the residue amount is invested just like a mutual fund. The policyholder goes on investing throughout the term of the policy years and collects the units later. These plans offer investors the option to invest in equity and debt.

Pension Plans

Also known as company pension plans, pension plans are set up by employers and can provide benefits including a tax-free lump sum (within certain limits), and pension income in retirement.

These benefits are based on the following parameters:

1. your final earnings

2. your average earnings throughout your career, or

3. the value of your pension fund at retirement.

Apart from benefits on retirement, pension schemes can provide benefits to dependants on the death of the account holder during service or after retirement. Pension benefits are also portable and need not be "frozen" when your employment status changes.

You should check if your employer has such a scheme and whether you are eligible to join. Or you may have been a member of such a pension scheme in the past and still have benefit entitlements under the plan.

NSCs

The best thing about the National Savings Certificates (NSC) is that unlike an insurance policy or a pension plan, they don't require a multi-year commitment. NSCs is perfect for those who don’t have time to browse through the features of an investment plan. At an interest rate of 8%, it is a good option for those who just want to invest in a hurry and forget about it. NSCs promise better returns than bank FDs. The interest earned on the NSC is eligible for deduction under Section 80C in the subsequent years. NSCs are suitable for senior citizens who want to invest safely but have exhausted the Rs 1.5 lakh limit of SCSS. Since there are no such restrictions in NSCs, they can use this instrument to save income tax.

Bank FDs

Tax-saving bank fixed deposit is an excellent choice for people who leave their tax planning for the last minute and then search for the best option. Although the interest rates are not as high as other savings instruments, FDs offer the convenience of online banking. If you have to show proof of investment this week, all you have to do is log on to your netbanking account, make the investment, download the proof and print it. However, this convenience comes at a high price. The interest earned on FDs is fully taxable, which reduces the post-tax return for people in the higher income bracket.

Life Insurance

Life insurance policies are essential for the safety and security of you and your family, but they are the least effective instruments to save income tax. They give fewer returns, have reduced rates of interest, and the interest collected is not even tax-free. However, it is a highly preferred mode of investment among the Indian populace; and if you wish to channelize your hard-earned money into insurance, then you must do a careful homework before taking a call.

Choosing the Right Option

Section 80C allows you to save up to Rs. 1.5 lakhs across different tax-saving investment instruments; so you might as well maximize your tax deductions. Investing in more than one option and taking calculated risks can pay off in the form of very high dividends that can be used to fund your dreams.