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An overview of 6 popular tax-saving options

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

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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. Here is a closer look at six popular options.
1. ELSS Funds
These are pure equity funds and have a three-year lock-in. The amount invested (up to Rs 1.5 lakh) is eligible for tax deduction under Section 80C.

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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.

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

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 options available at post-offices, which is used by many to create a regular monthly income stream after retirement.

3. 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.

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.

4. 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. They also do not offer adequate insurance.

5. 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 Q4 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.

6. 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. Your capital is not protected as the NPS invests a certain amount in equities. The returns are, therefore, market-linked.

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. You can make up to three withdrawals during the tenure.

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. Forty 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 you wish. There are no limits on deposits and withdrawals. Withdrawals will be taxed as per your slab.

Of the various options available under section 80C, the most beneficial is Equity-Linked Savings Scheme (ELSS). As an equity mutual fund, ELSS is especially useful for salaried people who usually 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 it is for all tax-saving fixed income options.

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