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Tax savings alternatives

There are a variety of tax-saving options available to investors. Here's an overview of the six most popular ones


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Tax Savings Alternatives

A good tax-saving investment must be an investment first and a tax-saver later. There are a number of schemes available to reduce your tax liability. Of the various options available under section 80C, the more useful is Equity-Linked Savings Scheme (ELSS).

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Basically, as an equity mutual fund, this is useful for most salaried people as they already have some amount going into fixed income through PF deductions. To balance that fixed income exposure, equity-based investments are the best option. Moreover, at three years, the lock-in for equity-linked saving schemes is shorter than all fixed income options. In this category, here are details of the major options:

ELSS Funds
These are pure equity funds and have a three-year lock-in. The amount invested is eligible for tax deduction under Section 80C.

The realised gains are treated as long-term capital gains and are taxed at 10 per cent. Long-term capital gains from ELSS are exempt up to Rs 1 lakh in a financial year.

National Savings Certificate (NSC)
This is a popular and safe small savings instrument that combines tax-savings with guaranteed returns.

Investments
Minimum: 100 per annum with certificates available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000.

Interest: 8% compounded half yearly on a 5-year tenure

Tenure: 5 years. Backed by the government, this is one of the safest investment option available at post-offices, which is used by many to create a regular monthly income stream after retirement.

Public Provident Fund (PPF)
This is a long-term savings instrument established by the Central Government, which offers tax concessions on savings as well as withdrawal after the lock-in period. A maximum of 12 deposits are allowed in a financial year.

Investments
Minimum: Rs 500 per annum
Maximum: Rs 1.5 lakh per annum
Interest: 8 per cent compounded annually
Tenure: 15 years. The PPF account matures after 15 years but the contribution has to be made for 16 years in all. One can extend the account in blocks of 5 years on completion of 15 years.

Unit Linked Insurance Plan (ULIP)
ULIPs are hybrid products that mix life insurance and investments. Like any other life insurance product, these offer life cover along with investment. In terms of transparency, returns and liquidity ULIPs fare quite poorly, particularly, in comparison to ELSS.

Sukanya Samriddhi Yojana (SSY)
The Sukanya Samriddhi Yojana (SSY) is a tax-free small savings scheme for the girl child. It was launched on January 22, 2015. The parents or legal guardians of a girl aged ten years or below can open an SSY account at any post office in India doing savings bank work or at any branch of a commercial bank authorised by the central government, with a minimum amount of Rs 250. 

Interest: 8.5 per cent (as of  Q3 FY19) compounded annually

Tenure: 21 years from the date of account opening. Or, one can redeem 50% corpus after the girl turns 18 or fully if the girl gets married after attaining 18 years of age.

National Pension System (NPS)
The NPS is a Government of India initiative to extend pension benefits to all Indian citizens. It is mandatory for central government employees and the employees of some state governments to invest in the NPS. As per a government directive, private-sector employees will now be given a choice between the Employees' Provident Fund Organisation (EPFO) and the NPS. The employee contribution is generally 10 per cent of the basic salary and DA, with a matching contribution made by the employer.

Capital protection & inflation protection
Your capital is not protected as the NPS invests a certain amount in equities. The returns are, therefore, market-linked. However, equities are expected to beat inflation over the long term thus building a certain level of inflation protection into the NPS.

Liquidity
In the case of the NPS, after three years of being in the scheme, you can withdraw up to 25 per cent of the contributions for defined expenses. These defined expenses are children's higher education or marriage, construction or purchase of the first house, and treatment of critical illness for self, spouse, children or dependent parents. The regulations have defined 13 critical illnesses and have extended this facility to accidents or other ailments of a life-threatening nature.

The point to note is that the 25 per cent limit will be calculated on the contributed amount, not on the account balance. Suppose you have contributed Rs 5,000 per month for ten years. You would be eligible to withdraw Rs 1.50 lakh, i.e., 25 per cent of Rs 6 lakh. You can make up to three withdrawals during the tenor.

Exit option
Tier I: If you wish to exit before age 60, you must use 80 per cent of the corpus to buy an annuity. You can withdraw 20 per cent of your corpus, but it will be taxed as per your income tax slab.

40 per cent withdrawals from the NPS are tax-free for those who retire at 60 years. Of the balance 60 per cent, you will have to use a minimum of 40 per cent towards the purchase of an annuity. The remaining 20 per cent can be withdrawn by paying tax as per your slab or can also be used to buy an annuity.

Tier II: In this voluntary account, you are free to withdraw your savings whenever your wish. There are no limits on deposits and withdrawals. Withdrawals will be taxed as per your slab.

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