AS THE fiscal end comes closer, it is time for investing to save tax. Apart from the regular investment options under Section 80C of the income tax act, this year investors have an added advantage of investing in infrastructure bonds and enjoy an additional deduction in tax under section 80CCF of the Income Tax Act.
SECTION 80C DEDUCTIONS:
Investment options under Section 80C can be broadly categorised as market linked, fixed income and insurance. The fixed income category includes investment options such as the Public Provident Fund (PPF), Employee Provident Fund (EPF), tax-saving bank fixed deposits, National Savings Certificate (NSC) and senior citizens savings schemes. While it is the most popular tax saving category, market-linked instruments including tax-saving equity mutual funds (ELSS) and unit linked insurance plans (ULIPs) are gradually catching up.
PUBLIC PROVIDENT FUND (PPF):
One of the oldest investment options, PPF scores on all grounds as it is one of the very few investment options that fall under EEE (exempt - exempt-exempt) tax regime. This implies that not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax.
PPF offers an interest rate of 8% compounded annually, with the maximum investment restricted to 70,000 a year and mandatory investment tenure of 15 years. An investment of 70,000 every year in PPF for 15 years will amount to a tax free maturity sum of 20.5 lakh at the end of the 15 year tenure.
EMPLOYEE PROVIDENT FUND (EPF):
Under the current norms, 12% of the employee's salary is contributed towards EPF, which is exempt from income tax. Any contribution over and above the 12% limit by the employee towards EPF is consider as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit of 1 lakh per annum.
Like PPF, EPF, also falls under the EEE tax regime wherein the interest received (on retirement from service) is tax-free in the hands of the investor.
The interest payable on EPF is determined each year by the Employee Provident Fund Organisation (EPFO). After having maintained a steady interest rate of 8.5% per annum for quite some time, the EPFO has enhanced the rate of interest to 9.5% for the financial year 2010-11. While it is still not sure whether such an attractive interest rate will continue in the following years, those who have been contributing to EPF for quite some time now and have accumulated a large corpus are bound to benefit immensely with this year's higher interest as interest is compounded annually.
NATIONAL SAVINGS CERTIFICATE:
Similar to PPF, NSC also earns an interest rate of 8% per annum and investment up to 1 lakh is exempt from tax under section 80C. However, unlike PPF, interest received on NSC, at the time of maturity, is taxable in the hands of the investor which makes it comparatively less attractive. On the positive note, however, NSC has a relatively shorter lock-in period of just about 6 years and the interest here is compounded half yearly. Thus, every 100 invested into NSC will grow to 160.10 on maturity.
TAX SAVING BANK FDS:
Investment up to 1 lakh in these special tax saving bank fixed deposits also entails an investor tax deduction under Section 80C. These fixed deposits mandate a lock-in period of five years and interest is compounded quarterly, just like any other ordinary bank fixed deposit. The drawback is taxability of interest income upon maturity. As most banks are currently offering attractive interest rates, tax-saving bank fixed deposits are currently offering interest rates as high as 8.5% to its investors.
SENIOR CITIZENS SAVING SCHEME:
Indian citizens who have attained 60 years of age or those who have attained at least 55 years of age and have opted for voluntary retirement scheme are eligible to invest in senior citizens saving scheme, which offers a fairly attractive interest rate of 9% a year, payable on quarterly basis. While investment in this scheme is eligible for tax deduction under Section 80C, interest earned shall be taxable in the hands of the investor.
EQUITY LINKED SAVINGS SCHEME (ELSS):
These tax saving mutual fund schemes do carry an embedded market risk and calls for investor prudence before making an investment decision. However, their returns are equally rewarding and tax free in the hands of the investor.
As ELSS has a mandatory lock-in period of three years, they are positioned as long-term equity assets and thus returns are tax free in the hands of the investor. And though these schemes mandate a three year lock-in period, investors are likely to be better off if they continue to stay invested for a longer term as equities generate best returns over a longer time frame.
For instance, on an average, ELSS category of funds has returned about 22% compounded (CAGR) returns per annum over the past 10 year period.
Some of the better performing schemes in this category include DSPBR Tax Saver, Fidelity Tax Advantage, Reliance Taxsaver and HDFC Taxsaver for investors to choose from.
LIFE INSURANCE PREMIUM:
Any premium payable by an investor to provide cover to his life is also eligible for deduction under Section 80C, subject to a maximum of 1 lakh. The life insurance policy may be purchased either from LIC or from any other private player in the insurance industry. Investors should, however, make sure that premium payable is not more than 20% of the sum assured (amount of life cover) in order to avail Section 80C deduction.
UNIT LINKED INSURANCE PLANS (ULIPS):
Ulips, or market linked insurance schemes, are also eligible for deduction under Section 80C. As these schemes provide investors the benefit of both life cover and investment in equity and debt markets, these are highly popular with investors. Investors would, however, do well to check the premiums charged by these schemes before making an investment decision as most Ulips charge high premiums.
SECTION 80CCF DEDUCTION:
A new Section 80CCF has been inserted in the Finance Bill 2010-11, which provides an additional deduction of 20,000 to investors for investing in infrastructure bonds issued by notified organisations. This deduction is over and above the 100,000 deduction available under Section 80CIn the latest tranche, infrastructure bonds offer an attractive interest rate of about 8% to investors with a minimum lock-in period of five years.
