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Make Money & Save On Tax

If you know which options are open to you and how to distribute your money between them, you can enjoy the best of both worlds

Except for Equity Linked Savings Schemes (ELSS), all tax saving investments are fixed return. It is interesting to see how in the peak of a bull run, fixed return investments are scorned by investors. Why park your money in a place that gives you a meagre return when the bulls are galloping ahead to give you 60 per cent per annum?

Go back to the five-year period from 1998 to 2002. The Sensex rose wildly and then fell to almost the same level. During these five years, your money would have stagnated in the stock market. If, instead, you had invested in a fixed deposit where you were earning 11 per cent or 12 per cent per annum (which was the rate then), you would have seen your money go up by about 75 per cent.

However lucrative the stock market, it is risky. So in every portfolio it makes sense to allocate some amount of money to fixed return instruments. And, if you can avail of the tax benefit while doing so, so much the better.

Five-Year Bank Deposits
Lock-in period: Minimum 5 years
Safety: High
Instrument: Fixed return
Annual return: Depends on market interest rates
Limit: None

This has been the latest addition to Section 80C. And, for those who love depositing money in the local bank, this one is a real boon. But do make careful note that any deposit with a tenure of less than five years will not be valid for the tax benefit.

As of now, you can expect around 8 per cent on such a deposit. Senior citizens will get 0.5 or 1 per cent more. So while this option scores high on convenience and safety, the hitch is that interest earned on bank deposits is taxed.

Public Provident Fund
Lock-in period: 15 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 500 (min) to Rs 70,000 (max) per FY

Though its interest rate has dropped from 12 per cent to 8 per cent per annum, it is still the darling of the tax saving instruments.

To add to its sheen, it also boasts of the exempt-exempt-exempt criteria, popularly referred to as EEE. What this means is that there is a tax exemption on contributions (when you deposit money), tax exemption on interest earned and tax exemption on withdrawals.

It can't get better than this though it can certainly get worse. In the future, the taxation methodology would shift to EET -- exempt-exempt-taxed -- which means that the withdrawals would be taxed.

National Savings Certificate
Lock-in period: 6 years
Safety: Highest
Instrument: Fixed return
Annual return: 8%
Limit: Rs 100 onwards. No upper limit

On the face of it, this one is identical to the PPF but with a lower tenure. While NSC offers the same interest rate of 8 per cent per annum, it is computed on a half-yearly basis, while PPF on an annual basis. On this point NSC scores.

Let's say on April 1, 2006, you invest Rs 30,000 in both, PPF and NSC. A year down the road, you would have Rs 32,400 in your PPF account but Rs 32,448 in your NSC. As the years go by, the difference becomes all the more pronounced.

But this benefit is nullified when you take the tax benefit of PPF into account. The interest you earn on NSC is taxed but is also eligible for a deduction under Section 80C.

Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such a case, it does not amount to a huge sum. If the above does not appeal to you, then you can claim the entire amount in the year of maturity under Section 80C.

While PPF is an ongoing account, NSC is a one-time investment available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000.

Employees' Provident Fund
Lock-in period: Dependent on the employment
Safety: Highest
Instrument: Fixed return
Annual return: 8.5%
Limit: 12% of monthly salary with employee given the option to increase contribution

The EPF is a retirement benefit scheme available to salaried employees. Under this scheme, a stipulated amount decided by the government (currently 12 per cent) is deducted from the employee's salary and contributed towards the fund with the employer making an equal contribution.

The flexibility exists for an employee to contribute more than the stipulated amount if the scheme allows for it. However, the employer is under no obligation to increase his contribution. Let's say the employee decides that 15 per cent of his salary must be deducted towards the EPF. In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12 per cent.

The amount accumulated in the PF is paid at the time of retirement or resignation. If you have worked continuously for a period of five years, the withdrawal of PF is not taxed.

PF can be transferred from one company to the other if one changes jobs. Even if you have not worked for at least five years but are transferring the PF to the new employer, it is not taxed. What's more, the tenure of employment with the new employer is included in computing the total of five years.

The message: If you withdraw it before completion of five years, you pay tax. Unless your employment is terminated due to ill-health.

Infrastructure Bonds
Lock-in period: Dependent on the bond, three years minimum
Safety: High
Instrument: Fixed return
Annual return: Depends on current market interest rates
Limit: None

The party is over for these. At one time, it was mandatory to invest in them. And financial institutions like ICICI and IDBI garnered phenomenal amounts of money due to this stipulation. Now that the investor has the flexibility to bypass this investment, this is exactly what is being done. And the financial institutions too have not been coming out with issues.

Of course, if you are very risk averse and want your money back as quickly as possible, this one seems to be the only tax saving option suited to both those requirements. Provided of course, the financial institutions do come out with an issue.