As the financial year (2012-13) is nearing to a close, salaried individuals and investors are busy planning their investments to save taxes. Most of them look for tax saving schemes under Section 80C of the Income-Tax Act, which would help them, besides saving  tax, get a return on investment without much risk.

With savings rate coming down, banks are also offering higher interest rates on deposits. They are also launching different savings schemes to enable investors channelise more funds into the banking sector.

There are many avenues for investors to save tax. Important among them are: tax saving deposit schemes offered by banks, home loans, equity-linked saving schemes of mutual funds and unit-linked insurance plans of insurance companies, retirement plans including public provident funds, national pension system and the recently-introduced Rajiv Gandhi Equity Savings Scheme.

 Many public sector banks have already launched their tax saving deposit schemes targeting these investors. State Bank of India has advertised its deposits scheme with a 5-year tenor offering 16.64 per cent effective annual yield in general and as much as 17.39 per cent for senior citizens. It has calculated these returns for investors in the higher tax bracket of 30 per cent and the rate of interest at 8.50 per cent for general investors and 9 per cent  for senior citizens.

But there is a catch here — though you can claim tax deduction under Section 80C for a maximum of Rs.1 lakh of your deposit, the interest that you get will suffer tax at the time of maturity at the maximum marginal rate applicable to you. For instance, if you are in the 10 per cent tax bracket, the interest you earn on the deposit will be taxed at that rate at the end of the 5-year period. If, for instance, you were in the 20 per cent tax slab when you placed the deposit but in five years your income has increased and you are now in the 30 per cent slab, the interest you earn on the deposit will be taxed at 30 per cent. This means that the anticipated return on the deposit will correspondingly fall on a post-tax basis. For an investment amount of Rs. 10,000, your immediate tax savings (assuming a tax bracket of 30 %) will be Rs. 3,090, which means the effective investment is Rs. 6,910. The maturity amount of original investment after five years will be Rs. 15,228 which will translate to a post-tax yield (after accounting for tax on accrued interest) of 13.40 per cent.

varadharajan.srinivasan

@thehindu.co.in

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