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. Invest soon and wisely. A last minute dash could mean 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.
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 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 ₹1.5 lakh limit. 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.
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 special mutual fund schemes 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, 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 Public Provident Fund (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 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. 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 PPF though.
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, it 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 elderly 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. The interest is fixed throughout the tenure but is taxable.
Pension scheme
It’s never too early to start planning for retirement income. The NPS, among the most cost-effective pension schemes, lets you choose the allocation between debt options and equity.
Make the most of Section 80C to build a diversified portfolio. 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.
ON THE MENU
. 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
