A good tax saving investment must be an investment first and a tax-saver later. There are a number of schemes available to reduce your tax liability. Of the various options available under section 80C, the more useful is Equity-Linked Savings Scheme (ELSS).
Basically, as an equity mutual fund, this is useful for most salaried people as they already have some amount going into fixed income through PF deductions. To balance that fixed income exposure, equity-based investments are the best option. Moreover, at three years, the lock-in for equity-linked saving schemes is shorter than all fixed income options. In this category, here are details of the major options:
ELSS Funds
These are pure equity funds and have a three year lock-in, you can deduct the amount invested from your taxable income and the returns on redemption, after lock-in, are tax free.
The returns are tax free by virtue of the fact that these are equity funds. Long-term gains (meaning gains on investments that have been held for more than one year) are tax free on all equity and equity fund investments, and that applies to ELSS too.
National Savings Certificate (NSC)
This is a popular and safe small savings instrument that combines tax-savings with guaranteed returns.
Investments
Minimum: 100 per annum with certificates available in denominations of Rs 100, Rs 500, Rs 1,000, R
Interest
7.6% compounded half yearly on a 5 year tenure
Tenure: 5 years. Backed by the government, this is one of the safest investment option available at post-offices, which is used by many to create a regular monthly income stream after retirement.
Public Provident Fund (PPF)
This is a long-term savings instrument established by the Central Government, which offers tax concessions on savings as well as withdrawal after the lock-in period. A maximum of 12 deposits are allowed in a financial year.
Investments
Minimum: Rs 500 per annum
Maximum: Rs 1.5 lakh per annum
Interest: 7.6 per cent compounded annually
Tenure: 15 years. The PPF account matures after 15 years but the contribution has to be made for 16 years in all. One can extend the account in blocks of 5 years on completion of 15 years
.
Unit Linked Insurance Plan (ULIP)
ULIPs are hybrid products that mix life insurance and investments. Like any other life insurance product, these offer life cover along with investment. However, it is left to the policyholder to make the investment choice from the available fund option, thereby transferring the risk of investment to the policyholder. Though these policies can be more profitable than a traditional insurance policy, they also have higher risks.
National Pension System (NPS)
The NPS is a Government of India initiative to extend pension benefits to all Indian citizens. It is mandatory for central government employees and the employees of some state governments to invest in the NPS. As per a government directive, private-sector employees will now be given a choice between the Employees' Provident Fund Organisation (EPFO) and the NPS. The employee contribution is generally 10 per cent of the basic salary and DA, with a matching contribution made by the employer.
Capital Protection & Inflation Protection
Your capital is not protected as the NPS invests a certain amount in equities. The returns are, therefore, market-linked. However equities are expected to beat inflation over the long term thus building a certain level of inflation protection into the NPS.
Liquidity
In the case of the NPS, after ten years of being in the scheme, you can withdraw up to 25 per cent of the contributions for defined expenses. These defined expenses are children's higher education or marriage, construction or purchase of the first house, and treatment of critical illness for self, spouse, children or dependent parents. The regulations have defined 13 critical illnesses and have extended this facility to accidents or other ailments of a life threatening nature.
The point to note is that the 25 percent limit will be calculated on the contributed amount, not on the account balance. Suppose you have contributed Rs 5,000 per month for ten years. You would be eligible to withdraw Rs 1.50 lakh, i.e., 25 per cent of Rs 6 lakh.
You can make up to three withdrawals during the tenor, with a gap of five years between each. This gap, however, is not applicable to critical illnesses.
Exit Option
Tier I: If you wish to exit before age 60, you must use 80 per cent of the corpus to buy an annuity. You can withdraw 20 per cent of your corpus, but it will be taxed as per your income-tax slab.
40 per cent withdrawals from the NPS are tax-free for those who retire at 60 years. Of the balance 60 per cent, you will have to use a minimum of 40 per cent towards the purchase of an annuity. The remaining 20 per cent can be withdrawn by paying tax as per your slab or can also be used to buy an annuity.
Tier II: In this voluntary account, you are free to withdraw your savings whenever your wish. There are no limits on deposits and withdrawals. Withdrawals will be taxed as per your slab.
Top 10 Tax Saver Mutual Funds for 2018
Best 10 ELSS Mutual Funds to invest in India for 2018
1. DSP BlackRock Tax Saver Fund
2. Invesco India Tax Plan
3. Tata India Tax Savings Fund
4. ICICI Prudential Long Term Equity Fund
5. Birla Sun Life Tax Relief 96
6. Franklin India TaxShield
7. Reliance Tax Saver (ELSS) Fund
8. BNP Paribas Long Term Equity Fund
9. Axis Tax Saver Fund
10. Birla Sun Life Tax Plan
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