Choose the right tax-saving option
Find out which is the best
instrument to save tax under Section 80C this year
The hike in the deduction limit
under Section 80C means that a taxpayer can reduce his tax by up to `15,000.
But the higher limit may not be of much use if you don’t know which tax-saving
option suits you best. ET Wealth graded the eight most common taxsaving
investments on the basis of returns, safety, liquidity, flexibility, taxability
of income and cost of investment. Here’s a look at these eight instruments.
ELSS FUNDS
There are compelling reasons why
ELSS funds should be part of the Returns equity allocation in a taxpayer's
27.34 % investment portfolio in 2015. They in past three may be low on safety
but they years score full points on all other parameters. The returns are high,
the income is tax free, the investor is free to alter the time and amount of
investment, the lock-in of 3 years is the shortest among all tax saving
investments and the cost is only 2-2.5% a year. The liquidity is even higher if
you opt for the dividend option and the cost is even lower if you go for the
direct plans of these funds.
Smart tip: Invest in the dividend
option which acts as a profit-booking mechanism and also gives you liquidity.
Dividends are tax-free.
ULIPS
For a lot of people, Ulip is still a
fourletter word. However, investors need to wake up to the new reality.
An ordinary Ulip is still a costly
proposition for the buyer. But the online avatar of these marketlinked
insurance plans is a low-cost option far removed from what was missold to
investors a few years ago. The Click2Invest plan from HDFC Life, for instance,
charges only 1.35% a year for fund management. Ulips can be used as a
rebalancing tool by the savvy investor. He can switch from equity to debt and
vice versa, without any tax implication. Buy a Ulip only if you can pay the
premiums for the full term. Also, take a plan for at least 15 years. A
short-term plan may not be able to recover the high charges levied in the
initial years.
Smart tip: Don’t invest in the
equity fund at one go.
Invest in a liquid fund and then
shift small amounts to equity fund.
PPF
Budget 2014 also hiked the annual
investment limit in the PPF. Risk Returns averse investors can now sock 8.7 %
away more in the ultra-safe for 2014-15 scheme. The PPF scores high on safety,
taxability and costs, but re turns are not so attractive and liquidity is not
very high. The scheme will give 8.7% this year but don’t count on this in the
following years. The interest rate on small savings schemes such as the PPF is
linked to the government bond yield and is likely to come down in the coming
years.
Smart tip: Open a PPF account in a
bank that allows online access. It will reduce the effort.
SR CITIZENS' SAVING SCHEME
The Senior Citizens' Sav Returns ing
Scheme (SCSS) is an ideal tax saving option for senior citizens 9.2 % above 60.
The money is safe and the for 2014-15 returns and liquidity are reasonably
good. However, the interest income received from the scheme is fully taxable. The
interest rate is linked to the government bond yield. It is 1 percentage point
higher than the 5-year government bond yield. Unlike in case of the PPF, the
interest rate will remain unchanged till the investment matures.
Smart tip: Stagger your investments
in the Senior Citizens' Saving Scheme across 2-3 financial years to avail of
the tax benefits.
NPS
The New Pension Scheme (NPS) is yet
to become a popular choice because Returns of the complex procedures in 8-11 %
volved in opening an account. But in past five investors who managed to cross years
that chasm have found it reward ing. NPS funds have not done badly in the past
five years. The returns from the E class funds are in line with those of the
Nifty, while corporate bond funds and gilt funds have given close to
double-digit returns. But financial planners believe that the 50% cap on equity
investments is too conservative. The other sore points is the lack of liquidity
and taxability of the income. The annuity income will also be fully
taxable.Smart tip: Start a Tier II account to benefit from the low-cost
structure of the NPS.
BANK FDS, NSCS
Bank FDs and NSCs score high on
safety, flexibility and costs but the Returns tax treatment of income drags
down the overall score. The inter8.5-9.1 % est rates are a tad higher than what
for 2015 the PPF offers but the income is fully taxable at the slab rate
applicable to the individual. They suit taxpayers in the 10% bracket (taxable
income of less than `5 lakh a year). The big advantage is that these are widely
available. Just walk into any bank branch and invest in its tax saving fixed
deposit.Smart tip: Build a ladder by investing every year.After the fourth
year, just reinvest the maturity amounts in fresh deposits.
PENSION PLANS
Pension plans from insurance compa
nies remain costly investments that Returns are best avoided. Instead, it may
be 8-18 % a better idea to go for the retire in past three ment funds from
mutual funds.
years They give the same tax
benefits but don't force the investor to annuitise the corpus on maturity. He
is also free to remain invested beyond the age of 60. Till now, all the pension
plans were debt-oriented balanced schemes.Last week, Reliance Mutual Fund
launched its Reliance Retirement Fund, an equity-oriented fund.However, ELSS
schemes and Ulips can be used for the same purpose.Smart tip: Wait for the
launch of retirement funds and assess their performance before investing.
INSURANCE PLANS
Traditional insurance plans are the
worst way to save tax. They require Returns a multi-year commitment and give
5.5-6 % very poor returns. The insurance for 20 year regulator has introduced
some plans customer-friendly changes but these plans still don't qualify as
good investments. The only good thing is that the income is tax free. But then,
so is the income from the PPF and tax free bonds. Another positive feature is
that you can easily get a loan against such policies, which gives some
liquidity to the policyholder.Smart tip: If you have a high-cost insurance
plan, turn it into a paid-up policy to ease the premium burden.
Neha
Pandey Deoras TOI13MAR15
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