Nobody likes the tax man, but dues have to be paid. With a little intelligent planning though you could and should save as much tax as you're allowed to and that is where we are headed to on the show today - tax saving investment options.
The sales pitch has already started, insurance and mutual fund agents are beginning the annual product push. But tax saving is more than just PPF and life insurance. Let’s find out what else you can do for that 80C tax kick.
Taxes are a very boring topic. We don’t want to think about paying taxes. But we're talking about saving taxes; it is just a little more exciting. Not much. After the show though, we will leave you with no excuses not to maximise your tax savings.
One would think this is something everyone does, right? Who doesn't want to save tax? We've met enough people in early years of their careers who find that they simply don’t have the money at the end of a financial year to put away for tax saving. Then we've had some pretty mature investors who do save taxes but sometimes in just anything their CAs or agent recommends. Our idea today is to help you take informed decisions on your tax investment choices. So let’s start with the basic section - section 80C, where most of your best options fall.
We first must understand what Section 80C means. You invest Rs 1 lakh in government approved financial products and your taxable income reduces by Rs 1 lakh. So if you were going to be taxed on Rs 5 lakh, after this you will be taxed on Rs 4 lakh. What this means is that:
# For investing Rs 1 lakh, for a person in the 10 per cent tax bracket, Rs 10,000 is saved
# For investing Rs 1 lakh, for a person in the 20 per cent tax bracket, Rs 20,000 is saved
# For investing Rs 1 lakh, for a person in the 30 per cent tax bracket, Rs 30,000 is saved
Look at all the products under Section 80 C as a basket of products from which you can choose according to your age, stage and need. First some spending products that will get you the Section 80 C benefit.
Let me start with some of the spending products which can be adjusted for tax saving. You simply need to remember to account for them when you fill your tax returns and take that deduction.
The Spending : 80C products include:
- School fees: Tuition fees for up to 2 children and up to Rs1 lakh is exempt every year
- Principal of home loan: Repayment of principal up to Rs 1 lakh. (We're not talking about the deduction you get on the interest paid on housing loan. That is different and gets deducted from your total earnings.)
Let’s come to the investing products. We look at it as those that are totally safe and those that are market linked. In the low risk space or the fixed return space, there are products where interest is taxable and those where interest is not taxable.
First up, the low risk 80C products with taxable interest:
# Bank Deposits
Notified 5-year tax saving FDs
Interest: Average 9 per cent
Tenure: 5 years
# National Savings Certificate (NSC)
Interest: 8 per cent
Tenure: 6 yrs
# Senior Citizens Savings Scheme (SCSS)
Interest : 9 per cent
Tenure: 5 yrs
# Post office time deposits
Interest : 7.5 per cent
Tenure: 5 yrs
Of course the best investment products under section 80C are where interests that you get at the end of the tenure is tax fee as well.
# Public Provident Fund (PPF)
Interest : 8 per cent (at present)
Tenure: 15 yrs
(Maximum allowed to be put away every year by each earning member of the family is Rs 70,000)
# Employee Provident Fund (EPF)
Interest: 8.5 per cent (at present)
Tenure: Till you retire
If you’re employed, when you get the Form16 from the employer sometime in March every year, it will automatically account for EPF contribution from your end. What YOU really need to take is the total investible amount under section 80C that is Rs 1 lakh minus your EPF contribution; and that's what you need to put away for maximising your tax savings.
Now, PPF and EPF should be the first choices, right? The only long term risk free, tax free guaranteed return product anybody can use for long term planning, right?
But two reasons will encourage you to move to the next level of risk - one is the Rs 70,000 cap and two, the long term equity returns are in the region of 12-15 per cent. A good enough reason to look at some equity products that come under section 80 C.
You can look at a special mutual fund called the ELSS or the equity linked saving scheme will get you the 80C benefit along with an equity exposure. There is a 3 year lock in and the long term capital gains is nil.
ELSS recommended:
# Birla Sun Life Tax Relief: 5-year returns is 11.47 per cent
# Principal Tax Savings: 5-year returns id 13.91 per cent
Another product you can buy is the ULIPs; of course we know that all insurance plans get the Section 80C benefit. Even your humble term plan. But we are focusing on the ULIP plans because that is what you are all buying. So here's a list of top 3 ULIP plans from Outlook Money on returns and 3 cheapest on costs:
On returns and where 60 per cent or more corpus is invested in Equities:
# Bajaj Allianz - Pure Stock : 7.14 per cent
# Kotak Mahindra - Kotak Aggressive Growth 5.80 per cent
# ICICI Prudential- Life's Maximiser II: 5.79 per cent
3 Cheapest ULIP funds
# Birla Sun Life' Classic Life Premier: 1.93 (cost %)
# Aviva Life's Freedom Life Plan: 2.18 (cost % - is what the fund charges out for managing your money)
# AEGON Religare Life's Protect Gain: 2.24 (cost %)
That pretty much recaps your tax saving investment options under section 80C. Of course there are other tax deductions you can get.
So, here’s hoping if we recommend you and give you all your options early enough and ahead of 31st March, you would be adequately reminded to use the next 3 months for putting money away in them.