It is that part of the year wherein the rush for investment in tax-savings schemes is at its peak. With only a few days to close the financial year (March 31, 2011), retail investors are keen to offload their earnings into savings instruments which are investment-oriented as well as assist them in saving taxes to a certain extent. As such, to assist the investor class in making such investment decisions, we have endeavoured to present a brief overview of the preferred investment tax-saving avenues.
Under the Income Tax Act 1961, tax deduction is available to certain tax savings instruments up to 100,000. Instruments which a retail investor should strongly consider are as under:
LIFE INSURANCE POLICIES:
Investment in life insurance policies serves three objectives, namely risk cover, investment and tax benefit depending, upon the scheme of the life insurance policy. An individual can buy and pay premium on an insurance policy in his name or in the name of his spouse and children. There is no limit on the insurance premium paid on such policies though for tax deduction, the maximum cap is of 100,000.
PUBLIC PROVIDENT FUND:
A PPF account is a long-term investment instrument for pre-meditated purposes such as children's education, marriage, retirement planning etc with a tenure of 15 years. An individual can invest up to 70,000 in a PPF account either in his name or in the name of spouse or children during a financial year. PPF scheme offers a rate of interest of 8% p.a. The contributions and interest earned thereon is wholly exempt from tax at the time of expiry of the account.
FIXED DEPOSIT SCHEMES:
Fixed deposits (FDs) with scheduled banks having a lock-in period of five years is also a favoured investment instrument under Section 80C. The rate of interest on FDs would vary from bank to bank. However, the interest on such fixed deposits is is taxed.
CHILDREN'S TUITION FEES:
Amount paid towards tuition fees of any two children of an individual for full-time education is also eligible for tax deduction under Section 80C. However, it shall not include payment towards development fee or donation or capitation fees or payment of similar nature.
NATIONAL SAVING CERTIFICATES:
Popularly known as NSCs, they are also favoured by retail investors considering that they are backed by the government and are one of the safest investment options with a maturity period of six years. The annual interest on NSC is chargeable to tax. However, the accrued interest for the first five years is deemed as reinvested and is entitled for Section 80C deduction.
HOME LOANS:
The principal portion of your home loan repayment instalment is eligible for deduction. Further, the stamp duty and registration charges are also eligible for deduction in the year of payment.
EQUITY-LINKED SAVINGS SCHEME:
An ELSS offered by mutual funds is a diversified equity scheme with a three-year lock-in, providing tax benefits under Section 80C. Taking an ELSS SIP (systematic investment plan) is the best solution to counter the volatility in the markets and average out the cost of investment over time.
In addition to the above instruments for which tax deduction is available under Section 80C, additional relief from tax is available under Section 80CCF on investments in long-term Infrastructure bonds of specified companies notified by the Reserve Bank of India (RBI). The maximum deduction that can be claimed for these bonds is 20,000 and the interest rate these bonds fetch is between 7.5% and 8%. Considering the higher interest offered by bank FDs, bonds do not seem an attractive option for investment. However, looking into the additional tax shield offered by these bonds, they are worth investing for middle and upper slab income earners.
