For an individual taxpayer, the most challenging investing decision is to select financial products that can reap good long-term returns. While there are many tax-saving financial products, good financial planning involves a right mix of investments in debt- and equity-related instruments which not only save tax, but benefit you financially.
For tax-planning, under Section 80C of the Income Tax Act, 1961, an individual taxpayer can invest up to Rs 1.5 lakh a year to claim deduction. The financial products include investments made in Public Provident Fund (PPF), life insurance premiums, employee’s contribution to provident fund, equity-linked savings scheme of mutual funds, unit-linked insurance plans, etc.
Unit-linked Insurance Plans (ULIPs)
Linked life insurance product offer the advantage of life cover with an investment in equity and debt markets. After this year’s Budget announced long-term capital gains tax on stocks and equity mutual funds, ULIPs have gained traction as the most tax-efficient investment. The returns from ULIPs are completely tax-free. Even cost wise, the insurance regulator had made a lot of changes to make the products transparent and investor-friendly.
The lock-in period is five years and one can opt for debt market-linked ULIPs and move to equity when the market is moving up to attain higher returns. However, the mortality charges levied on ULIPs can reduce the net investment of the policyholder. While both ULIPs and mutual funds are for long-term investing, the latter score over the former because of liquidity. In mutual funds, an investor can redeem units any time by paying short-term capital gains of 15% if done before one year of investing or 10% long-term capital gains tax if done after one year (as per the Budget proposal to be applicable from April 1). But in ULIPs, an investor is stuck for five years.
Equity-linked Savings Scheme
With good returns and a tax-free status, ELSS funds offer a great opportunity to be part of effective tax management. However, being an equity-linked fund, there is no guarantee of returns as returns mirror the stock markets and the financial sentiment of the market in general. ELSS are open-ended, that is, investors can subscribe to the fund any day. ELSS funds score better than other tax-savings scheme like PPF, National Savings Certificates and five-year bank fixed deposits as it has a lock-in period of only three years.
By taking the SIP route, one can stagger the investments, which would, in turn, bring down the risk sizeably. An investor can put as little as Rs 500 in ELSS, unlike other equity-oriented funds where the minimum investment is Rs 5,000. With SIP, you can invest a fixed amount every month for up to 15 years.
National Pension Scheme (NPS)
It is becoming a popular financial instrument for creating a retirement corpus. After the additional tax benefit of Rs 50,000, the number of subscribers has increased in this pure defined contribution pension product which was introduced in 2004 for government employees and in 2009 extended to private sector. For private sector employees, an investor has three options of life cycle funds in the auto choice. In the aggressive option, an investor can invest up to 75% in equity. In the moderate life cycle fund up to 50% in equity and up to 25% in conservative fund.
Now, the PFRDA wants to raise the equity exposure in active funds to 75% from 50% at present. In an active fund, an investor decides himself on the asset allocation subject to the 50% equity cap. The only drawback of NPS is that an investor has to pay tax on 20% of the money that will be withdrawn after maturity as a lump sum. Also, annuity income is taxable. Products like PPF and EPF are tax-exempt at all the three stages — investment, accumulation and withdrawal. Subscribers of NPS Tier 1 account can now make partial withdrawal of up to 25% of contributions after 10 years of being in the scheme.
Public Provident Fund (PPF)
It is the most popular tax-saving instrument and the interest rate is linked to bond yields. The interest rate is fixed every year on April 1 and is 25 basis points over the 10-year government bond yield of the previous year. Currently, PPF gives a return of 7.6% per annum compounded yearly. One can deposit a minimum of Rs 500 up to Rs 1.5 lakh in 12 instalments or as a lump sum. One gets tax deduction at the time of investment every year, the income generated in the scheme will be tax-exempt, and even the corpus at the time of withdrawal will be tax-free. In fact, PPF is a popular small saving scheme to accumulate funds for children’s education and retirement.
Source by:- financialexpressShare: