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Tax Saving Investments

Tax Saving Investments: 8 Tax Saving Instruments in India

When a financial year is near its end, the biggest worry you have is how to allocate and declare your investments to save on the amount of tax you have to pay. Rather than waiting till the very end, be pro-active about investing earlier and reaping better tax benefits within the current financial term. From a tax saving perspective, you should always be on the lookout for instruments where the inherent risk as well as the investment amount is low and the capital gains and exemption from tax is high.

Let’s have a look at the assets that best serve these investment objectives, updated as per the budget 2014-2015: –

Tax Free Bonds

These bonds are debt securities issued by public sector entities and they can be looked at as a profitable long term savings option, as the interest earned on these bonds is non-taxable. In addition, bonds that have AA and AAA credit ratings are very likely to meet their financial commitments. However, one must understand that returns on these bonds are beneficial only after completing the lock-in period because the returns are guaranteed at maturity. However, if you decide to sell these bonds before the lock-in period ends, then you may get an amount higher or lower than the initial investment made.

13 public sector institutions were allowed to raise Rs.48,000 crore through tax-free bond, in 2013-14. However there was no announcement on new tax-free bond issuances in the Union Budget 2014-15. However, with the possibility of a future rate cut, these bonds stands to offer higher rates. Thus the absence of an announcement is seen as a positive outcome for existing bonds.

Equity Linked Savings Scheme (ELSS)

ELSS is an equity-oriented mutual fund in which the returns are tax free as per Section 80C of the Income Tax Act, 1961. The best thing about ELSS is that the lock-in period is just 3 years and since the gains are earned through equity investments, they may be relatively higher than Fixed Deposits and other debt-oriented saving instruments. And although it is a good short term investment-cum-tax saving option, you must be well-aware of its past performance and be fine with taking a moderate amount of risk while investing.

As per the budget 2014-2015, with the increase in the investment limit in Section 80C from Rs.1 Lakh to Rs.1.5 Lakh, investors can get higher tax benefit on amounts invested ELSS up to 1.5 Lakh.

Rajiv Gandhi Equity Savings Scheme (RGESS)

RGESS is a little different from standard ELSS despite being equity-based. Approved by Finance Minister P. Chidambaram on September 21, 2012, this scheme has been introduced to encourage first time investors into adopting the equity culture. The maximum investment allowed is 50,000 INR and 50% of that amount can be used for tax benefits under Section 80 CCG. For both ELSS and RGESS, the returns are market based with a moderate to high amount of risk and the dividends earned are tax-free. However, unlike an ELSS where in the lock-in period is 3 years, RGESS has a lock-in period of just 1 year. A smaller investment amount and a lesser lock-in period definitely makes the RGESS a more appealing option if you are investing in equity savings scheme for the first time. Click here to read more on benefits of investing in RGESS Scheme.

5-year and 10-year NSCs

NSCs are saving certificates issued by Post Office and are a good tax saving instrument. The 5-year and 10-year lock-in periods offer guaranteed returns at maturity and although the interests earned are taxable as per an individual’s income tax slab, there is no Tax Deducted At Source (TDS) .

Tax Saver Fixed Deposits

As per the provisions under section 80C, fixed deposits with a Bank for a lock-in period of no less than 5 years is exempted from tax. This exemption is applicable within the 1,50,000 INR limit (as per the budget 2014-15) which also includes instruments like Life Insurance and Provident Funds.

Life and Health Insurance

Life Insurance is a very important investment instrument which gives assured returns on maturity and risk cover to protect your family in case of any untimely events. It is also a tax saving investment which gives you tax benefits under section 80C for the premium paid towards the policy. Once the policy term finishes, there are additional benefits to be availed as well. As applicable from April 1st, 2012 under section 10(10D), if the premium paid per year for the policy duration is less than 10% of the assured sum, then the amount received on maturity is exempted from tax deduction. However, as stated by the finance bill 2014 –  “In order to have a mechanism for reporting of transactions and collection of tax, in respect of sum paid under life insurance policies which are not exempted under section 10(10D) of the Act, it is proposed to insert a new section in the Act to provide for deduction of tax, at the rate of 2 per cent on sum paid under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) of the Act.” In other words, any sum received under a life insurance policy, which does not satisfy conditions laid down in section 10(10D) will now be subject to withholding tax at the rate of 2%.

As for health insurance, you can get tax benefits under section 80D of up to 15,000 INR on policies for yourself, spouse and children. And if you are paying health insurance premium for your parents as well, then you can get an additional deduction of 15,000 INR taking the total benefit to 30,000 INR. These benefits however, are subject to a couple of conditions –

  • You should be under 65 years in age.
  • Policy premium must be paid through cheque or credit card and not cash. Policies whose premium is paid through cash do not qualify for the said benefit.


Public Provident Fund

One of the traditional yet highly preferred retirement planning instrument, it is also a great long-term tax saving investment providing an interest of 8.7% annually for the 2013-14 term. It allows you to make a maximum investment of 1,50,000 INR per annum (increased from 1,00,000 INR per annum as per the budget 2014-15). Additional benefits include the option of taking loans from the start of the 3rd year to the end of the 5th year, as well as withdrawals from the 6th year onwards. The best part of saving in a PPF is that the accumulated amount including the interest received on maturity is non-taxable under Section 80C of the Income Tax Act, 1961.

Tax Planning Advice can be beneficial

In essence, all these instruments are good options for saving income tax and providing decent returns. However, it can be difficult to figure out how the available finances can be allocated for these instruments. That is where professional tax planning comes into the picture. Banks and other non-banking financial institutions have dedicated departments to assist individuals with their tax planning needs. Case in point TaxAssist, an advisory service from Axis Bank that provides you with an opportunity to save up to Rs.41,715 on Income Tax. Customers can also access expert advice on various tax saving investment options under Section 80C, 80D and 80CCG covering Life Insurance, Health Insurance, ELSS (Mutual Funds), Tax Saver Fixed Deposits, PPF and Rajiv Gandhi Equity Savings Scheme (RGESS) by visiting any of the bank’s branches.

Now that we have learned about various tax saving investment, let’s read more on tax benefits offered by different types of loan

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