8 Tax saving instruments you should know about

“March is coming,” thought Arun, “I need to plan my taxes for Section 80C. What should I plan?”

Like most working professionals Arun had heard of Section 80C of the Income Tax Act, 1961. But he was a little unclear of what ALL the Section included?

The need to reduce tax outgo at the end of the financial year gives the Section the importance it commands. Under Section 80C, individuals and Hindu Undivided Families can claim a tax deduction of up to 150,000 rupees from their gross annual income for certain investments and payments. The catch is that the deduction is allowed only on specific investments. Your investments may not be taxable, the returns sometimes attract tax, so it is crucial to choose instruments with the minimum tax burden. Consider these eight tax-saving instruments.

1. Equity Linked Saving Scheme

Equity-linked savings schemes are mutual funds with two differentiating characteristics - they are eligible for tax benefits under Section 80C and have a three-year lock-in period. However, investors should tread with caution as market volatility can have a bearing on the returns. Ideally, investment in ELSS should be made for a tenure of five to seven years as equity schemes create wealth over long periods.

Under section 80C, the following provisions are made to ensure substantial tax reduction on funds related to the ELSS scheme.

• The total principal amount invested in ELSS is exempt from taxation, provided the amount is under Rs. 1.5 Lakh.
• Any capital gains less than Rs. 1 Lakh is not charged with long term capital gains tax.
  The tax liability can be managed through the regular harvesting of capital gains.

2. National Pension Scheme

The government began this program to provide a retirement pension to professionals during their working years. The fund is invested in equity, fixed deposits, corporate bonds and government funds among others. The quantum of equity exposure is decided by the investor. The fund accumulates in your NPS account which is paid as pension post-retirement. You can also choose to withdraw a part of the corpus in a lumpsum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

Under the scheme, 60 percent of the corpus can be withdrawn after retirement, which has been made tax free. As per the latest rules, investors can allocate up to 75 percent of funds to equities based on their risk appetite.

NPS provides many tax benefits:

For employees

• Tax deduction of up to 10% of pay (Basic + DA) under Section 80CCD(1), subject to a maximum of Rs.1.5 lakh under Section 80CCE.
• Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.
• For self-employed individuals who contribute to NPS:
• Tax deduction of up to 20% of gross income under Section 80CCD(1), subject to a total limit of Rs.1.5 lakh under Section 80CCE.
• Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.

For employers:

• Employer's contribution towards NPS of an employee is eligible for a tax deduction of up to 10% of salary, i.e. basic plus DA, or 14% of salary if such contribution is made by the Central Government under Section 80CCD(2) beyond the Rs.1.5 lakh limit provided under Section 80CCE.

On withdrawal:

• Section 10 provides a tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years or superannuation.
• Tax exemption is provided on annuity purchase or superannuation at 60 years under Section 80CCD(5). However, the subsequent income from an annuity is taxed under Section 80CCD(3).

3. Public Provident Fund

The contributions to the Public Provident Fund are eligible for tax deductions under Section 80C of the Income Tax Act. The deductions are limited to Rs 1.5 lakh.The return in this scheme is linked to government bond yields in the secondary market.

• The investment is locked-in for 15 years, with partial withdrawals allowed after seven years.
• A PPF account can be opened through a post office branch or a designated state-owned bank.It has a maximum contribution limit of 150,000 rupees, so the entire amount can be claimed as a deduction.
• The accumulated amount and interest is also exempt from tax at the time of withdrawal. It is important to note that a PPF account cannot be closed before maturity.

4. Senior Citizens’ Savings Scheme

This scheme is an ideal investment option for people above 60. The amount invested is eligible for tax benefits upto Rs 1.5 lakhs under section 80C.

It provides a lock-in period of five years which can be extended by three years, if you so desire. The scheme pays 8.2percent on investments, which is the highest among small savings schemes.

5. Sukanya Samriddhi Yojna

In order to majorly address the issue of the declining child sex ratio in our country, the Government of India launched a social campaign on 22 January 2015.

The minimum deposit amount for an SSY account is Rs.250 (thereafter in multiples of Rs.50, and the maximum is Rs.1,50,000 in every financial year, up to 15 years. Deposits can be made through cash, cheque, demand draft or online transfer.

The scheme is aimed at savings for the girl child, which can be used for her education and marriage after maturity. Any guardian of a girl below 10 years can open this account. The interest rate is linked to government bond yields and change every quarter.

• Investments made in the SSY scheme are eligible for deductions under Section 80C, subject to a maximum cap of Rs 1.5 lakh.
• The interest that accrues against this account which gets compounded annually is also exempt from tax under Section 10 of the Income Tax Act.
• The proceeds received upon maturity/withdrawal are also exempt from income tax.

6. Unit Linked Investment Plans

Investing in Tax Saving ULIPs can offer both protection and savings. The investment is eligible for deduction under Section 80C of the Income Tax Act, 1961. Besides providing insurance, it channels one's savings into various market-linked assets. ULIPs have a lock-in period of five years, but they can have a duration of 15 to 20 years or more. Income from ULIPs is tax-free. Investing in a child ULIP is a prudent option, as these schemes waive off premiums in case the parent dies and continues to invest in the policy.

7. National Savings Certificate

Investment(s) made in the National Savings Certificate is eligible for deduction under Section 80C. The interest earned on NSC is not taxed annually. It thus provides a tax deferral benefit. For example, if you invest in the certificates, you are eligible for a deduction in taxes on the principal amount for the first year. In the second year, you can ask for tax deductions on the investments that year as well as the interest accrued on the principal amount in the first year. You can claim tax deductions separately because the interest is added to the investment and is annually compounded.

It allows investors to defer the tax liability on the interest until the maturity of the NSC, providing an opportunity for the investment to grow.

The scheme has a tenure of five years. The interest earned on investments in NSC is around 8 percent, similar to what other fixed-income schemes fetch.

8. Five Year Bank Deposit

Specially designed as tax savings schemes, these bank deposits have a lock-in period of five years. The interest earned is not as high as small savings schemes, but it is the best option for those who leave tax planning for the last minute. The investment qualifies for the deduction, but the interest earned is fully taxable. They also qualify for deductions under Section 80C.

Conclusion

Tax saving is an essential part of financial planning and should be given due importance. Section 80C of the Income Tax Act, 1961 provides multiple options for tax savings upto a limit of Rs 1.5 lakh. You should see which investment works best for your specific requirements. Some options provide better returns and some provide comparatively safer returns, you can also rank them in preference according to the tenure and the basic need they serve. You can choose one or a combination of a few to plan your tax savings for the year.

For detailed information on this plan including risk factors, exclusions, terms and conditions etc., please refer to the policy document and consult your advisor, or, visit our website before concluding a sale. Tax benefits are as per the Income Tax Act 1961 and are subject to any amendment made thereto from time to time. You are advised to consult your tax consultant. Future Group’s and Generali Group’s liability is restricted to the extent of their shareholding in Future Generali India Life Insurance Company Limited.