While a PPF and insurance policies offer some stability to your portfolio, ELSS ad NPS offer to create wealth in the long term.
In case you’re a tax payer and haven’t planned your tax saving investments yet! You just have two months to go. It is imperative to understand the eligible expenditure & investments allowed under various income tax provisions so as to take a wise investment decision. The popularly known Section 80C provides deduction for certain expenditure such as home loan principal, stamp duty & registration charges for a home and tuition fee of the children with an overall limit of Rs. 150,000 without any individual sub limits. It is important to note that some expenditure that we normally incur can give tax exemptions without undertaking any specified investments.
For salaried employees, their contribution towards employees’ provident fund qualifies for deduction under section 80C. In addition, there is an array of investment options to choose such as public provident fund (PPF), national saving certificate, life insurance premium, five year bank fixed deposits, post office time deposit & equity linked tax saving schemes (ELSS) to help you save tax. Let’s look at the three most popular options - life insurance, PPF & ELSS.
Premium paid on the insurance policy taken in the name of the individual or his/her spouse/children is eligible for tax deduction. But, this comes with a catch. The deduction is restricted to 10% of the sum assured or premium paid whichever is lower for those policies issued from 1-4-2012. For instance, if the policy was taken in April 2012 and the premium paid was Rs 60,000 for the sum assured of Rs 400000, the deduction would be restricted to 10% of the sum assured ie 40,000. Hence, out of Rs 60,000, one will be eligible to claim deduction of Rs 40,000 only.
Guaranteed return and the highest safety for the investment drive investors towards public provident fund (PPF) despite a 15 year lockin. It is backed by the Government of India. The interest rate is set every financial year, benchmarked against the 10 year government bond yield. Currently, the interest rate of PPF is 8.70% compounded annually. It also falls under Exempt –Exempt - Exempt category i.e. tax exemption under section 80C for investments up to Rs 1.50 Lakh, the interest earned is tax free and the accumulated amount on maturity is also exempt from tax. Similar to a mutual fund SIP, one can space out the investment over a 12 months installment in a year. Unlike other investments, PPF account enjoys privileged status and cannot be attached under any court order with regard to any debt or liability of the account holder.
ELSS, also known as tax saving funds, have been gaining traction among investors due to potential higher returns, impressive performance track record and lower lock in compared to the traditional investment options. ELSS is primarily an equity oriented diversified fund ideal for those willing to take market risk and volatility. It comes with a lock in period of 3 years, the lowest among the tax saving schemes. It offers you the twin benefits of potential upside of capital appreciation and regular income through tax free dividends. From a taxation stand point, the capital appreciation is eligible for long term capital gains tax benefit which makes it a tax free gain. Although there is no certainty in returns, Historically, equities have outperformed most of the asset classes like debt, gold by a significant margin making a compelling case for diversifying a substantial part of your investment in ELSS. The top 10 ELSS funds have generated an average return of 18% & 13% compounded annualized return over a trailing 3 and 5 year periods respectively. While there is no upper limit, investments up to Rs 1.50 lakh per year is eligible for deduction under section 80C.
Last but not the least, one can get additional 50,000 exemption under Section 80CCD by investing in New Pension Scheme (NPS) taking the total tax exemption upto Rs 2 lakh in a financial year. The scheme is open to every Indian citizen between the age group 18 – 60 years. Investors have three options to choose ie equity, corporate Debt and government securities based on individual’s risk perception. Expense ratio of the scheme is 0.01%, one of the world’s least cost investment options. However, some of the major disadvantages are – withdrawal allowed ONLY upon attaining the age of 60 or in case of any unforeseen circumstances, maturity amount taxable at the time of withdrawal & 40% of the NPS maturity must be mandatorily used to buy an annuity which is again taxable. One can consider a part of their investment in this offering, if they are in the younger age group with a very long term horizon to create wealth.