It is again that time of the year when many of the taxpayers invest in tax saving instruments to save their tax. There is a large population of these investors which is risk-averse and does not want to expose itself to the risk of equity investments. For these investors, there are many fixed income options which can help them achieve their target of saving tax under section 80C and at the same time provide good returns also on their investments.
PPF: Public Provident Fund, or popularly called PPF, is the most attractive tax-saving fixed income option giving a tax-free return of 8.80% per annum compounded annually. The effective rate of interest for a person in the 30% tax bracket works out to approximately 12.73% [8.80%/(1-0.309)], which I think is extremely good, considering it also gives you a tax deduction.
Though the government has decided to adjust the interest rate on PPF every year on April 1st and most likely it is going to fall next financial year, still it would remain very attractive due to its tax-free interest income status. The maximum you can invest in PPF is Rs. 1 lakh per financial year.
You can get a PPF account opened in post offices, bank branches of SBI and its associate banks and select private banks such as ICICI Bank. PPF carries a term of 15 years but it can be extended for additional 5 years. A loan facility of up to 25% can be availed from the 3rd financial year till the 5th financial year while a withdrawal of up to 50% is allowed from 6th financial year onwards.
Senior Citizen Savings Scheme (SCSS): Meant for senior citizens aged 60 years or more, SCSS offers 9.30% per annum. The interest payable quarterly is taxable and subject to TDS if the interest amount crosses Rs. 10,000 in a financial year. It has a maturity period of 5 years which can be extended for a further period of 3 years. The maximum you can invest in SCSS is Rs. 15 lakhs but the exemption u/s. 80C would be limited to Rs. 1 lakh only.
5-year Bank FDs: A faster life these days makes the investors opt for simpler investments and fixed deposits are the most simple to invest option. Different banks offer different interest rates on their tax-saving FDs and you can visit this link to check out the rates offered. These FDs have a lock-in period of 5 years and the interest is taxable.
5-year NSCs: National Saving Certificates (NSCs), offered by the post offices, give an interest rate of 8.60% per annum compounded half-yearly. The interest is paid at maturity but it is taxable annually. With these NSCs, the amount invested as well as the interest earned every year qualify for a deduction under section 80C. Post offices do not deduct any tax at source though.
10-year NSCs: During the last financial year, the government introduced NSCs with a maturity period of 10 years. These certificates currently offer 8.90% per annum compounded half-yearly. Rest of their features are the same as that of 5-year NSCs.
Post Office Time Deposit Scheme: Post offices also offer tax-saving time deposit with a maturity period of 5 years carrying 8.50% per annum interest rate. The interest is payable annually but compounded quarterly. Also, though the interest paid is taxable but TDS is not deducted by the post offices.
Term Deposit Schemes from Government Companies: A few government companies or financial institutions like National Housing Bank (NHB), HUDCO, NABARD etc. also offer tax-saving term deposits with a lock-in period of 5 years. The interest payable is taxable and subject to TDS if the interest amount crosses Rs. 5,000 in a financial year.
NHB offers 9.25% per annum compounded quarterly to the general investors and 9.85% to the senior citizens. NHB is wholly owned by the RBI and hence the deposits are considered as risk-free. It has also been assigned a rating of ‘FAAA’ by CRISIL.
It is important to note that except PPF, the interest rates offered currently on these investments will remain fixed throughout their respective tenures even if the government announces new rates starting April 1, 2013 and in the subsequent years.