You must have already picked your tax saving products for this year or you must be doing it now. Everyone wants their investments to earn returns. Though your priority is to save taxes, wouldn’t you love it if your tax saving investment comes with some returns? How much is that some? Let’s analyze the various tax saving investment products available to us and the returns that they deliver on an annual basis.
This is the latest tax saving weapon introduced to the people of India. Rajiv Gandhi Equity Savings Scheme (RGESS) offers you tax saving beyond the traditional 80C section. You can invest up to Rs. 50,000 in this product and get tax deduction up to Rs. 25,000. It is available for the first time equity investors whose income is up to Rs. 12 lakh p.a.
Returns offered: 10-12% p.a
Tip for you: RGESS is not an easy product to understand like fixed deposit. Also, for a first time investor, it is better to start with simple products and then get into equity investment.
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Employee provident fund (EPF) needs no introduction. Almost every employee would be contributing to this. You are eligible for deduction up to Rs. 1 lakh for investment in this product.
Returns offered: 8.75% p.a
Tip for you: Note down the yearly contribution to your EPF account so that you would know how much is left in the 80C section. Ignoring this contribution can lead you to pick products which you might not need.
Public provident fund (PPF) offers you tax deduction up to Rs. 1 lakh under section 80C. The best part about this product is that apart from this deduction, interest received and the maturity amount are totally exempt from tax. You can invest in PPF either at the beginning of the year or in intervals such as monthly or quarterly. Tenure of investment would be 15 years.
Returns offered: 8.7% p.a
Tip for you: PPF interest is calculated by 5th of every month. So, if you want to receive interest for that month, do invest before that date.
Investment in National Savings Certificate (NSC) is tax deductible up to Rs. 1 lakh under section 80C. You have two options in NSC with respect to tenure i.e. 5 year or 10 year.
Returns offered: 8.5% p.a for 5 year product and 8.8% p.a for 10 years
Tip for you: Interest received from NSC is taxable. Though interest amount is received at the time of maturity, you need to declare this amount every year while filing your returns. Think of the lock-in and the taxation before choosing this as your tax saver.
NPS (New pension system) is believed to be one of the cheapest retirement products available, even with the increase in its charges. It offers two different deductions – 1) Own contribution under 80CCD (1) up to Rs.1 lakh p.a and 2) Employer contribution under 80CCD (2) with no upper limit.
Returns offered: 8-12% p.a (based on the fund)
Tip for you: If you are already investing in EPF for retirement, you should not be considering NPS just for tax saving purpose. Also, it has an equity investment limit of 50%. For a retirement product, this should be more in the initial stages. Mutual funds would be more appropriate in such a case.
Note that not all fixed deposits provide tax benefit. Only fixed deposits (FD’s) of investment tenure of 5 years of more are eligible for tax deduction under section 80C.
Returns offered: 8.5-9.5% p.a
Tip for you: FD is a very simple product to understand. It is also hassle free for investment purpose. However, there is a lock-in of 5 years on this product. In a way, you are fixed to an interest rate and even if interest rates increase later, you cannot take the benefit of higher rates.
Equity linked savings schemes (ELSS) are a part of section 80C limit. They have a lock-in period of 3 years and you are not allowed to withdraw money till that period. These are diversified equity mutual funds which also offer tax benefit.
Returns offered: 8-10% p.a
Tip for you: If you are a beginner and lack knowledge in mutual funds, better avoid these. ELSS is just like any other mutual fund and as you know mutual fund is a tough product to understand. Investing in ELSS without proper research can lead you into losing the tax benefits gained and also generate losses on your capital.
Senior citizens savings scheme (SCSS) as a tax product is also a part of section 80C. It is a post office product available for senior citizens i.e. above 60 years of age. Maturity period of the product is 5 years and it can be extended up to 3 years after maturity.
Returns offered: 9% p.a
Tip for you: You cannot withdraw from this product before 5 years. The only option would be premature closure of the account after 3 years. Keep this in mind while investing in the product. A senior citizen also needs liquidity for the invested amount. You can invest partly in this product.
Life insurance and health insurance offer you tax benefits in the form of section 80C and section 80D. You can claim the premium amount of all life insurance policies under 80C and that of health insurance or mediclaim policies under 80D (up to Rs. 15,000 p.a).
Returns offered: 5-6% p.a
Tip for you: While investing in insurance does give you tax benefits, there is a condition that premium amount should not exceed 10% of the sum assured to be eligible for this deduction. Also, refrain from investing in life insurance policies which mix insurance and investment. Higher charges and other restrictions in these policies result in lower returns.
These are the various tax saving products available for investment. Before choosing any of these, do remember that these are also investments for you. Investment should never be done without purpose. That purpose can’t be only ‘tax saving’. Tax saving should always be part of the overall financial plan.