It may well be the case that at this point you may be scouting for options that save you tax. So other than factoring in liquidity, risk, return, you also need to understand post-tax returns from the investment. As tax implication on returns, heavily eats into the earnings for an individual and investor fails to get decent returns that may well be below the rate of inflation so the real returns turn out to negative.
For instance, an individual in the highest tax bracket of 30% will get only 4.8% p.a post-tax return from 5-year tax saving bank deposit fetching interest @ 7%.
So, while there are available a host of options that save you tax, there are only a handful of investments that offer the dual benefit of tax saving and tax-exempt income. And to make the prudent choice among these, here is a quick detail covering all aspects such as features and interest rate.
1. ULIPS or Unit linked insurance plan:
The hybrid product provides risk-cover as well as investment benefits from money committed to different market-linked assets. The asset allocation in the policy is distributed across debt and equity and generally there are 5 to 10 fund options in most ULIPS.
The term of the ULIP usually spans 15-20 years and can be even more nonetheless the-lock in period is 5-years i.e an investor is allowed to exit the scheme after this time frame. Proceeds from ULIP received as fund value are tax-exempt both upon maturity or if encashed after the 5-year lock in period.
But you should choose such a scheme only if the goal for such an investment is 10 or 15 years away as experts opine that unlocking funds from the scheme after the lock-in period will be financially damaging. Also, remember that the returns from the product are not guaranteed and only if you can afford the risk element of such a product bet on it.
All traditional insurance schemes including endowment, money-back and whole-life plan provide Sec 80C benefits in respect of the premium amount paid. Also the death benefit and maturity proceeds are tax-free in the hands of the investor.
In traditional schemes there is a savings element attached with fixed sum assured and term period. Premium on such plans is based on insured age at the entry time in a scheme, life coverage required and the term of such cover.
But, it is no be noted that these plans offer low returns of just between 4-6% per annum and are also inflexible with respect to tenure and sum assured value.
ELSS are tax-saving mutual funds which qualify for deduction under Section 80C of the Income tax act. An individual by investing in an ELSS scheme can claim a maximum deduction of upto Rs. 1.5 lakh in a financial year.
Further, till now returns from such schemes are tax free in the hands of investors after a lock-in period of three years. This is because ELSS are typically equity-oriented schemes with exposure of 80% or more to equities and as currently there is no LTCG on equities, the return on them is tax-free. Also the dividends in an equity scheme are tax-free.
But as the govt. in its Budget 2018 has proposed a LTCG tax on equity @ 10% on gains of over Rs.1 lakh, these may soon lose their tax-free status.
With sovereign guarantee on both principal and interest payment, the small saving scheme currently offering 7.6% p.a (with revision of rates every quarter) earns tax-free income for investors.
The PPF investment with a tenure of 15 years can be extended indefinitely in block of 5 years. It can be opened in a designated post office or a bank branch. The facility is also available with some of the banks online. A minimum of Rs. 500 and a maximum of Rs. 1.5 lakh can be invested in a financial year. The minimum limit for the account is to keep the account active.
So, investors who want assured returns with no volatility exposure can bet on the investment. But for high inflation-adjusted returns, you will need to take the equity asset class route.
EPF which is a social benefit scheme to meet your retirement needs commits 12% basic salary and DA of a salaried individual mandatorily. Similar contribution is made by the employer but only a part of it goes into this fund.
An employee’s contribution towards the account is eligible for tax deduction u/s 80C upto a limit of Rs. 1.5 lakhs in a year but it is to be noted that employer contribution is not eligible for such rebate. And both the contribution of employer and employee earns tax-free return for the salaried which is determined every year by the govt.
For the 2016-17, EPF earns 8.65% tax-free return and for the FY 18, the return is expected to go down with the proposed 10 bps reduction.
6. Sukanya Samriddhi Account:
This scheme is a must if you have a girl child at home. There are a number of reasons why this is among the best tax free investments in India. The first is that the interest rate at 8.1 per cent beats most fixed yielding instruments in the country. The second is that it offers tax free interest income and the third is that amounts of upto Rs 1.5 lakhs qualifies for tax exemption under Sec 80C of the Income tax Act.
Source by:- goodreturnsShare: