With the tax-planning season in progress, you should brace yourself for a lot of 'noise' that you will soon be subjected to. The noise will come from various quarters. Mutual funds will hawk tax-saving funds (also referred to as equity linked saving schemes), while insurance companies will pitch in for ULIPs (unit linked insurance plans) and endowment plans.
The objective of all this noise is to capture a share of your tax-planning kitty i.e. investments of upto Rs 100,000 that are eligible for deduction from gross total income under Section 80C.
However one front that is likely to be silent is the assured return schemes segment. Assured return schemes like Public Provident Fund, National Savings Certificate and tax-saving fixed deposits are also eligible for tax benefits under Section 80C. While there is unlikely to be any hype surrounding these avenues, the fact remains that they can add value to your tax-planning portfolio.
For example, if you are a risk-averse investor, these investment avenues should occupy a lion's share of your tax-planning portfolio. Conversely, if you are a risk-taking investor, these instruments can occupy a minor portion from an asset allocation perspective. We have always maintained that investing for the purpose of tax-planning is no different from investing in the normal course. Hence factors like risk profile, diversification and asset allocation must be taken into account while tax-planning as well.
In this article, we profile 3 investment avenues from the assured return schemes segment that you can consider adding to your tax-planning portfolio.
1. Public Provident Fund
Investments in PPF are of a recurring nature and run over a 15-Yr period. Investors are required to make annual contributions to keep their PPF accounts active. The minimum and maximum investment amounts are Rs 500 and Rs 70,000 per annum respectively. Only contributions of upto Rs 70,000 per annum are eligible for a tax benefit. Any amount invested over the aforementioned sum is returned without interest. At present, investments in PPF earn a return of 8.0 per cent per annum, compounded yearly. It should be noted that investments in PPF offer an assured return, but the rate of return is subject to change. Hence you could find your investments earning a lower or higher return, depending on how the interest rates are revised.
Liquidity
PPF scores poorly on the liquidity front. Withdrawals are permitted only from the seventh financial year. Also, the amount that can be withdrawn is a factor of the balance in the PPF account in the earlier years.
Tax implication
Apart from Section 80C tax benefits at the time of investing, interest income from investments in PPF is exempt from tax under Section 10(11) of the Income Tax Act.
Who should invest
With a 15-Yr investment horizon and the stipulation for making annual contributions, PPF can become an ideal avenue to build a corpus to meet your long-term needs like retirement or children's education.
Small savings schemes: An overview
2. National Savings Certificate (NSC)
NSC offers the opportunity to make lump sum investments for a 6-Yr period. The minimum investment amount is Rs 100, while there is no upper limit. Presently, investments in NSC earn a return of 8.0 per cent per annum, compounded on a half-yearly basis. Hence Rs 100 invested in NSC will grow to Rs 160.1 on maturity. The rate of return is locked in at the time of investment. Hence investments are insulated from any subsequent change in rates.
Liquidity
NSC scores poorly on the liquidity front. The interest income is received on maturity. Furthermore, premature withdrawals are only permitted under specific circumstances like death of the holder(s), forfeiture by the pledgee or under court's order.
Tax implication
Interest income from NSC investments is chargeable to tax. However, the interest accruing annually is also deemed to be reinvested, hence it qualifies for deduction under Section 80C.
Who should invest
Given that the rate of return is locked-in and that the investments run over a 6-Yr time frame, NSC can be used to gainfully invest one-time surpluses and to provide for needs that will arise over a corresponding timeframe.
3. Tax-saving fixed deposits
Tax-saving fixed deposits are conventional fixed deposits offered by banks; however investments therein (upto Rs 100,000 per annum) are eligible for tax benefits under Section 80C. These fixed deposits have an investment tenure of 5 years and the minimum investment amount is generally Rs 100. At present, most banks offer a rate of return in the range of 8.0 per cent-8.5 per cent per annum. A higher rate of return (additional 0.5 per cent) is offered on investments made by senior citizens.
Liquidity
Premature withdrawals are not permitted. However, investors can choose the regular interest payout options (subject to the same being offered by the bank) for liquidity.
Tax implication
Interest income from tax-saving fixed deposits is chargeable to tax. Also unlike PPF and NSC, the same is subject to TDS (tax deduction at source).
Who should invest
Investments in tax-saving fixed deposits have a locked-in rate of return and a predetermined investment horizon. You can align your investments with your future needs.
As can be seen, the assured return segment has a wide range of investment avenues to offer. The onus for making the right choice and getting invested in an apt instrument lies with you.
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