Personal Finance

Max your tax break

Anand Kalyanaraman | Updated on January 13, 2018


Dragana Gordic/

Invest early and wisely from a plethora of choices

Not done your tax-saving investments yet? Get cracking; the financial year end is just about a month away. You can put up to ₹1.5 lakh in Section 80C instruments each year. This can save you a tidy sum in taxes — ₹15,450 for those in the 10 per cent tax slab, ₹30,900 in the 20 per cent tax slab, and ₹46,350 in the 30 per cent slab.

There is a plethora of choices, broadly of three kinds — investment-based, insurance-based and expenditure-based. These include provident funds, pension plans, insurance schemes, equity mutual fund schemes, home loan principal repayments, schemes for girl children and senior citizens, and more.

Choices galore

Equity - ELSS

Debt - EPF, VPF, PPF, NSC, SCSS, Sukanya Scheme, 5-year deposits

Expenses - Home loan principal repayment, kids’ tuition fees

Insurance and pension plans

Invest soon and wisely. A last minute dash could mean falling prey to sales spiels and making sub-optimal choices. Don’t invest just to save tax; that’s a sweetener. Choose the investment based on your age, objectives, risk profile, return and liquidity expectations. Here are a few pointers:

How much?

If a part of your salary is going towards the Employee Provident Fund (EPF) or Voluntary Provident Fund (VPF), these can be claimed for tax breaks under Section 80C. The principal portion of your home loan monthly instalments or repayments, and tuition fees you pay for your kids’ education also qualify for the tax benefit. So, you have to invest only the balance to reach the annual ₹1.5 lakh limit. You are free to deploy more money but the excess will not get you tax benefits. Also, the Public Provident Fund (PPF) and Sukanya Samriddhi Scheme have a maximum annual limit of ₹1.5 lakh. There is an exception though; the National Pension System (NPS) allows tax benefits on an additional ₹50,000 under Section 80CCD.

Get insured

First, get yourself covered. If you have dependants but are not insured yet, go pronto for term life insurance plans. These are available quite cheap online. The thumb-rule is to have life cover equal to about 10 times your annual income. Avoid insurance-cum-investment products — these are expensive and yield low returns. It’s best to keep insurance and investments separate.

Equity choice

As for investments, there is no one-size-fits-all. If you are young and are game for some risk, Equity Linked Savings Schemes (ELSS) can be a good choice to deploy some money. These are special mutual fund schemes that invest in equities and have a lock-in of three years. Equities, though riskier, can give much higher returns than safer debt instruments in the long run. But if you already have equity exposure, either through stocks or mutual funds, ELSS may not be necessary.

Debt options

Also, if you are older and cannot afford risks, it’s better to stick to debt investments that give fixed returns. Among the best debt options is the PPF. It gives 8 per cent a year currently (this can change every quarter) and is highly tax-efficient — the investment gets a tax break, the interest earned is tax-exempt and so is the maturity amount. With a 15-year tenure that can be extended in blocks of five years, the PPF is one of the best ways to build a long-term corpus for your retirement or children’s education. This makes it a good option even for young investors.

The five-year National Savings Certificate (NSC) that also gives 8 per cent currently (fixed throughout the tenure) is a good option too. It is a tad less tax-efficient than the PPF though. Still, it’s a good choice for those seeking a shorter lock-in period. If you have a daughter less than 10 years old, you are lucky.

You can invest in the Sukanya Samriddhi Scheme that is even better than the PPF. It offers a higher 8.5 per cent currently (this can change each quarter) and similar to the PPF is highly tax-efficient.

All these debt investments though are cumulative schemes. The interest keeps compounding until maturity. This can be a problem for those who seek regular income, for instance, many retired people. The Senior Citizen Savings Scheme is a good choice for such elder investors.

This five-year investment, extendable by three years, offers 8.5 per cent currently (fixed throughout the tenure) and the interest is paid out quarterly. But these payouts are taxable. Another choice open to all investors is the long-term tax-saving deposits (five years and above) offered by banks and post offices. These currently offer 6-7.8 per cent interest that can be accumulated or paid out at the choice of the investor. The post office gives the best 7.8 per cent while among banks, Deutsche Bank (7.75 per cent) and IDFC Bank (7.2 per cent) offer the best deals. The interest is fixed throughout the tenure but is taxable.

Pension scheme

It’s never too early to plan for retirement income. The NPS, among the cost-effective pension schemes, lets you choose the allocation between debt options and equity.

Make the most of Section 80C options to build a diversified portfolio, and save tax. This is a good starting point but it may not be sufficient to reach your target corpus. So, don’t restrict yourself to the 80C limits. As and when possible, invest more, even if you don’t get tax breaks.

Limited benefit

Up to ₹1.5 lakh in Section 80C instruments each year will get you tax breaks

Published on February 20, 2017

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