Multiple options. Contradictory advice. And a deadline that's approaching fast. Many taxpayers find themselves in this situation at the beginning of the year when they have to make tax-saving investments.
Are you also confused? Before you make a choice, go through our cover story to know which is the best option for you. We have ranked 10 of the most common investments under Section 80C on five basic parameters: returns, safety, flexibility, liquidity and taxability. Every investment has its pros and cons. source : economic times
1) PUBLIC PROVIDENT FUND
RETURNS: 8.7% (for 2013-14)
This all-time favourite became even more attractive after the interest rate was linked to bond yields in the secondary market.
The PPF is our top choice as a tax saver in 2014. It scores well on almost all parameters. This small saving scheme has always been a favourite tax-saving tool, but the linking of its interest rate to the bond yield in the secondary market has made it even better. This ensures that the PPF returns are in line with the prevailing market rates.
This year, the PPF will earn 8.7 per cent, 25 basis points above the average benchmark yield in the previous fiscal year. The benchmark yield had shot up in July and has mostly remained above 8.5 per cent in the past six months. Although the yield is unlikely to sustain at the current levels, analysts don't expect it to fall below 8.25 per cent within the next 2-3 months. So it is reasonable to expect that the PPF rate would be hiked marginally in 2014-15.
The PPF offers investors a lot of flexibility. You can open an account in a post office branch or a bank. However, the commission payable to an agent for opening this account has been discontinued, so you will have to manage the paperwork yourself. The good news is that some private banks, such as ICICI Bank, allow online investments in the PPF accounts with them. There's flexibility even in the quantum and periodicity of investment.
The maximum investment of Rs 1 lakh in a year can be done as a lump sum or as instalments on any working day of the year. Just make sure you invest the minimum Rs 500 in your PPF account in a year, otherwise you will be slapped with a nominal, but irksome, penalty of Rs 50. Though the PPF account matures in 15 years, you can extend it in blocks of five years each. However, this facility is no longer available to HUFs.
The PPF also offers liquidity to the investor. If you need money, you can withdraw after the fifth year, but withdrawals cannot exceed 50 per cent of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. Also, only one withdrawal is allowed in a financial year.
You can also take a loan against the PPF, but it cannot exceed 25 per cent of the balance in the preceding year. The loan is charged at 2 per cent till 36 months, and 6 per cent for longer tenures. Till a loan is repaid, you can't take more. If you dip into your PPF account, be sure to put back the amount at the earliest. Withdrawing from long-term savings is not a good strategy if you do it frequently. It can dent your overall retirement planning.
The PPF is especially useful for risk-averse investors, self-employed professionals and those not covered by the Employees Provident Fund and other retiral benefits.
BRIGHT IDEA: Invest before the 5th of the month if you want your contribution to earn interest for that month as well.
2) ELSS FUNDS
RETURNS: 17.5 per cent (Past five years)
The potential for high returns, wide choice of funds and flexibility make these funds a good tax-saving option for equity investors.
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-saving options under Section 80C. However, this should not be the most important reason for investing in this avenue. Being equity funds, these schemes can generate good returns for investors over the long term. In the past five years, this category has created wealth for investors with average returns of 17.5 per cent.
However, this potential to earn high returns comes with a higher risk. There is no guarantee that your investment will generate positive returns after the 3-year lock-in period. The category has generated an average return of 2 per cent in the past three years. Even the best performing funds have churned out disappointing returns. The returns will naturally mirror the performance of the stock markets. Therefore, only investors who have the stomach for a roller-coaster ride should consider this option.
BRIGHT IDEA: Don't invest a lump sum. Split investments in ELSS funds into three SIPs starting from January till March.
3) RGESS
An avoidable option for the first-time equity investor
The RGESS allows first-time equity investors earning up to Rs 12 lakh a year additional tax savings under the newly introduced Section 80 CCG. If you invest in the RGESS options, you can claim a deduction of 50 per cent of the invested amount. The maximum investment is Rs 50,000, so the maximum deduction availed of can be Rs 25,000. This is over and above the Rs 1 lakh limit available under Section 80C.
4) ULIPs
RETURNS: 7.2-11.8 per cent (Past five years)
Don't go by the past record. The new Ulip is a good way to invest in the equity and debt markets for tax-free returns.
There's a good reason why this most hated investment is so high on our rating scale. For many policyholders, Ulips denote the costly mistake they made a few years ago. But that was a different era, when companies were gobbling up 50-60 per cent of the premium in the first few years in the guise of charges.
The 2010 guidelines have reformed the Ulip, turning it into a more customer-friendly investment. Though a Ulip should not be your first insurance policy, you can consider buying one as an investment that also helps you save tax. Of course, it also offers a life cover, but the stress is on investment, not protection. Don't buy a Ulip (or any other insurance policy, for that matter) if you are not sure whether you can continue paying the premium for the entire term. If you end it prematurely, be ready to pay surrender charges.
5) VOLUNTARY PF
RETURNS: 8.5 per cent (for 2013-14)
This little used option is available only to salaried taxpayers covered by the Employees' Provident Fund.
The contribution to the Employees' Provident Fund (EPF) is a compulsory deduction, as also an automatic tax saver. However, you can contribute more than 12 per cent of your basic salary that flows into the EPF every month. This voluntary contribution will earn the same rate of interest, will fetch you the same tax benefits under Section 80C and the maturity corpus will also be tax-free.
A key disadvantage is the limited liquidity that the Provident Fund offers. You cannot access the money till you retire. A one-time withdrawal is allowed in special circumstances, such as medical emergency, purchase or construction of a house, or a child's marriage.
6) SENIOR CITIZEN'S SAVING SCHEME
RETURNS: 9.2 per cent (for 2013-14)
This remains the best way for retirees to save tax, though the Rs 15 lakh investment limit is a damper.
This assured return scheme is the best tax-saving avenue for senior citizens. However, the Rs 15 lakh investment limit somewhat curtails its utility as a tax-saving option. The interest rate is 100 basis points above the 5-year government bond yield.
7) NSCs AND BANK FDs
RETURNS: 8.5-9.75 per cent
They appear attractive, but taxability of income takes away some of the sheen from these instruments.
There are many misconceptions about bank fixed deposits in the minds of investors. Many think that up to Rs 10,000 interest from bank deposits is tax-free, as announced in the budget two years ago. This is not true. The newly introduced Section 80TTA gives a deduction of up to Rs 10,000 on interest earned in the savings bank account, not on fixed deposits and recurring deposits.
8) LIFE INSURANCE POLICIES
RETURNS: 5.5-7.5 per cent
Despite the revised guidelines, insurance plans are still not a good investment. Only HNI investors will find the tax-free corpus appealing.
Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly by ensuring a higher surrender value and larger life covers, they are still the worst way to save tax. The tax saving is only meant to reduce the cost of insurance. It is not the core objective of the policy. Money-back and endowment insurance policies score low on the flexibility scale. Once you buy a policy, you are supposed to keep paying the premium for the rest of the term. This can be a problem if you took the policy only to save tax.
For a cover of Rs 25 lakh, you will have to spend Rs 2.5 lakh a year. They also give niggardly returns. The internal rate of return (IRR) for a 10-year policy comes to around 5.75 per cent. For longer terms of 15-20 years, the IRR is better at 6.5-7.5 per cent. As for the tax benefit, there are simpler and more cost-effective ways to save tax, such as 5-year bank FDs and NSCs. If the taxability of the income worries you, go for the tax-free PPF.
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