As we (in India) come into last quarter of the financial year, tax saving instruments come into focus. Its your last chance to plan and invest in appropriate instruments that will help save taxes and increase your retention from your hard-earned income. With this in mind, Team RetyrSmart brings you the following article that nicely analyses available instruments and lists out their pros and cons.
Retain more of your earnings by investing in 80C
NEW DELHI: A colleague has advised Rohan Vinayak to invest in ELSS funds to save tax. His bank manager says an insurance policy is a better idea. Vinayak's father wants him to go for the time-tested PPF. The Bengaluru-based software professional can't afford to lose time. "I have to show proof of my taxsaving investments by the end of this week or my company will deduct a very high tax, he says.
ET Wealth's annual ranking of tax saving instruments can resolve Vinayak's dilemma. We have assessed 10 taxsaving instruments on eight key parameters—returns, safety, flexibility, liquidity, costs, transparency,ease of investment and taxability of income. Each parameter is given equal weightage and the composite scores of the various options determine their rank.
ELSS FundsReturns 13.62 per cent (Past three years)
Equities had a terrific 2017, and the rally has continued into the new year. The average ELSS fund rose 36 per cent during 2017, and even the long-term performance is fairly decent. Investors have seen their wealth double in a little over four years. What's more, the returns are tax free because long-term capital gains from equity funds are exempt from tax.
While ELSS funds look attractive, the market is at an all-time high level and the Nifty is trading at a PE of 27. Many analysts have advised investors to be cautious. Others say that expectations of returns from equities need to be toned down.
Public Provident FundReturns 7.6 per cent (For January-March 2018)
Small savings rates have progressively come down in the past two years, mirroring the decline in bond yields. The PPF rate was cut recently by 20 basis points and could fall further in the coming months. Despite the rate cut, advisers say the PPF remains a good bet because the interest is tax free. The taxfree status of the PPF gives it a distinct advantage over fixed
deposits. The interest from fixed deposits is fully taxable, which brings down the returns to barely 5 per cent in the highest bracket. The PPF also scores high on safety, flexibility and ease of investment.
Senior Citizens: Saving SchemeReturns 8.3 per cent (For January-March 2018)
Small savings rates were cut, but the Senior Citizens; Savings Scheme was spared. At 8.3 per cent, this is the best option for retirees looking for regular income in their golden years. The highest rate offered to senior citizens by banks is 7.7 per cent. The tenure of the scheme is 5 years, which is extendable by another 3. But there is a ₹15 lakh overall investment limit, and it is open only to those above 60.
Sukanya Samriddhi YojanaReturns 8.1 per cent (For January-March 2018)
For taxpayers with a daughter below 10 years, the Sukanya Samriddhi Yojana is a good way to save tax. Although the interest rate has been reduced to 8.1 per cent, it is still higher than what the PPF offers. Like the PPF, the interest is tax free and there is an annual cap of ₹1.5 lakh on the investment. Accounts can be opened in any post office or designated banks. A parent can open accounts for up to two daughters, but the combined limit is ₹1.5 lakh in a year.
National Pension SchemeReturns 9.5 per cent (Past three years)
The NPS can help save tax under three different sections. Firstly, contributions of up to ₹1.5 lakh can be claimed as a deduction under the overall Sec 80C. Secondly, there is an additional deduction of up to ₹50,000 under Sec 80CCD(1b). Thirdly, if the employer puts up to 10 per
cent of the basic salary of the individual in the NPS, that amount will not be taxable.
The trinity of tax benefits has attracted a lot of investors to the pension scheme. But many are still put off by the fact that it is not completely tax free. Only 40 per cent of the corpus is tax free on maturity. It also forces the investor to put 40 per cent of the corpus in an annuity to earn a taxable monthly pension.
ULIPsReturns 9.9-11.9 per cent (Past 5 years)
Despite attempts by distributors and insurance companies, the perception about Ulips has not changed much. Investors still consider them very costly and financial advisers hold them in contempt. But new Ulips launched by insurance companies are low on costs, which translates into better returns.
Morningstar data shows that aggressive Ulip plans earned over 20 per cent in the past one year. That may not appear impressive compared to the 30- 35 per cent that equity mutual funds earned. Some of the charges of the Ulip are deducted by reducing units so the actual returns for the investors may be even lower.
NSCsReturns 7.6 per cent (For January-March 2018)
The interest rate of the NSCs has been reduced to 7.6 per cent, but are still more than what bank fixed deposits offer. The NSCs also have a sovereign backing. NSCs fell out of favour when bank rates were higher at 9-9.5 per cent, but now they have fallen to 6.5-7 per cent. This makes the NSCs more attractive than bank deposits. What's more, the interest earned on the NSC is also eligible for deduction under Section 80C in the following years.
Pension PlansReturns 7-10 per cent (Past one year)
The emergence of the NPS has pushed pension plans from insurance companies into oblivion. Unlike the new Ulips, these pension plans continue to have high charges. However, while NPS investors have to put 40 per cent of the corpus in an annuity, some pension plans don't have such restrictions, while others require only 25 per cent to be put inannuities.
Insurance companies believe that the tax treatment of annuities and pension income is one of the main reasons why people don't go for pension plans. "There might be several reasons for people not saving for retirement but the taxability of pension plans is certainly one of them, contends Tarun Chugh, CEO MD, Bajaj Allianz Life Insurance.
Bank FDsReturns 7-7.7 per cent
Their interest rates have fallen significantly and the income is fully taxable. Yet taxsaving bank fixed deposits are a good choice for taxpayers who are now running around to beat the deadline. Their tax planning can be done in a matter of minutes. Use the Netbanking facility to open a tax-saving fixed deposit and show the proof of investment to your company. We aresuggesting bank fixed deposits because you cannot go wrong in these instruments. Sure, the post-tax returns will be barely 5.5 per cent. But at least you won't end up buying a low-yield insurance policy or pension plan.
InsuranceReturns 4.5-5 per cent
It's no surprise that insurance policies are at tenth place in our ranking. Life insurance is the bulwark of a financial plan because it safeguards all the goals of the individual even after they pass. But this purpose is best served by a pure protection term insurance plan rather than a costly traditional policy that yields barely 4-5 per cent returns. Buyers are attracted by the maturity sum.. .