Tuesday, 2 August 2016

Which tax-saving investment best suits your needs? Find out

"More and more investors have realized the importance of investing early and have begun making tax savings instruments at the beginning of the new financial year "

Gone are the days when you waited till the end of March to invest in tax-saving instruments to claim exemptions. More and more people have realized the importance of investing early during the year, which can bring relief to you and make investments sensible too. 

To give an example, it is widely seen that young investors put money either in a five-year bank fixed deposits (FDs) or endowment insurance schemes.
Now, instead of going in for these routine options, investors have begun putting the same amount in equity-linked saving schemes (ELSSs), which will enable them to enjoy the benefits of compounding and rupee cost averaging.


With rising awareness not only individuals but also financial institutions have started promoting tax-saving financial products at the start of the year.


The beginning of a financial year is a good time to start tax planning as it will give enough time to understand various financial products and thus help get more returns. In India, there are a range of tax-saving products from Public Provident Fund (PPF) and National Saving Certificates (NSC) to ELSS.
 

However, instead of blindly putting in money to save taxes, you need to plan for future and invest accordingly. 


The Savings Route: Tax-saving investments should be chosen from various asset classes so as to build your financial portfolio while lowering your tax burden.
In this article i will explain where you can invest and how you can benefit from investing in right products at the right time.

Must Read : Why Real Estate is a dull investment compared to Mutual Funds

NATIONAL SAVINGS CERTIFICATE (NSC)

National Savings Certificate also known as NSC is a successful  tax-saving instrument in both rural and urban India. NSC is backed by the government of India, and is one of the safest investment options available at post offices across the country. 


Currently, NSC offers interest at the rate of 8.10% and is a popular and safe small savings instrument that combines tax savings with guaranteed returns.

The interest is paid at maturity but is taxable annually. Investment up to 1 lakh per annum qualifies for income tax rebate under section 80C of the Income-tax Act. However, the interest that accrues every year is included in your taxable income and is liable for tax payment. 


Certificates can be bought from any head post office or general post office.
As far as liquidity is concerned NSC is liquid, despite the 5- and 10-year stipulated lock-in period. The liquidity is offered in the form of loans and withdrawals are subject to conditions. The amount and rate at which the loan is permitted depends on the lending institution.
 

This scheme is mainly for small businessmen and salaried individuals. People buy NSC every month for 10 years, which is re-invested on maturity as after retirement it will automatically fetch a monthly pension as the NSC starts maturing.

National Savings Certificates are not  inflation-protected. If inflation is above interest rates, it will fetch negative returns. But in present scenario where inflation is low, you can earn real return from this investment product.


Must Read : Retirement Planning : Beating the Inflation Blues

FIVE-YEAR BANK FIXED DEPOSITS (FDS)
 

Five-year bank fixed deposits are not  picked as often as other investment  products despite of it giving rebate under section 80C of the Income-tax Act. Five-year bank fixed deposits is a tax-saving investment product with a shorter duration and can be opted if you are a risk-averse investors. 

FDs offered by various banks have a lock-in period of five years and the interest is taxable. Different banks offer different interest rates on their tax-saving FDs. You can earn better interest through FDs as compared to the 4% to 5% interest otherwise earn from your savings bank accounts.

Currently, many private banks offer 7% to 8.5% interest on five-year FDs. The main advantage of such FDs is the guaranteed higher interest on them instead of regular bank deposits.
 

Here again you can enjoy the benefits when inflation is below the rates offered by banks. The interest rate is fixed and guaranteed for the duration of the deposit at the commencement of the deposit. The bank deposit is liquid, despite the lock-in during the tenure of the deposit. The liquidity is offered in the form of loans and withdrawals are subject to conditions. In case of an emergency, you can close FDs prematurely at the cost of losing the interest otherwise earn if it was kept till maturity.
 
Must Read : Why Diversification is a Must in Portfolio

PUBLIC PROVIDENT FUND (PPF)

Despite interest rates being cut for the current financial year from 8.7% to 8.1%, Public Provident Fund (PPF) remains the top choice for tax savers since many years. PPF is completely risk-free in nature as it is backed by the government of India. 

A person cannot open more than one account in his or her name or even have a joint account. The minimum amount of investment in a PPF account is 500 per annum and the maximum amount of investment in a year is 1.5 lakh. In case of a minor’s account, the investment in the minor’s and guardian’s account together cannot exceed 1.5 lakh per annum.
 

Deposits can also be made in 12  installments at the most in a year. PPF comes with a lock-in period of 15 years, which makes it a long-term investment option. PPF also offers liquidity to the you if you need money, you can withdraw after the fifth year, but withdrawals cannot exceed 50% of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower.
 

Also, only one withdrawal is allowed in a financial year. You can also take a loan against PPF. But it cannot exceed 25% of the balance in the preceding year. Invest before the 5th of the month if you want your contribution to earn interest for that month as well. The biggest advantage of the scheme is that, it is EEE in tax status, meaning investments are exempt, interest earned is exempt and final corpus is tax free in the hands of the investors.

Must Read : Top 3 Large Cap Mutual Funds to Invest in 2016

National Pension Scheme

NPS as it is called is one of the cheapest investment options available to investors not only in India but also in the global markets. It is a defined contribution-based pension scheme,
launched by the government and is effective from 1st April 2009.


Earlier only government employees were able to enjoy the benefits of NPS, but now you can also invest in NPS and save for retirement.

The biggest advantage of NPS is the additional tax benefit of 50,000 under Section 80C of the Income-tax Act, which means investors would get tax benefits of 2 lakhs.
 

In order to bring parity among pensioners, in the last Union budget it was announced that investors can withdraw 40% of the total corpus at the age of 60, which would be entirely tax free. This new announcement will have a positive impact on NPS and might attract fresh flows as one of the major issues of taxation has been resolved by the government.

However, one of the major drawbacks of the scheme is that you cannot take out money before 60 years. But it is one of cheapest schemes available for them who want to enjoy an additional tax exemption of 50,000 and are willing to wait for retirement. For many investors, this is a positive feature as it prevents premature withdrawals. But a number of them refrain from investing in PPFs due to the longer tenure.


Must Read : Top 3 Mid Cap Mutual Funds Churning Money For Investors

EQUITY-LINKED SAVINGS SCHEME (ELSS)

Equity-linked savings scheme or  ELSS gives you the option to invest 100% in equities and claim tax exemption under Section 80C of the Income-tax Act. ELSS has the shortest lock-in period of three years among all tax-saving options under Section 80C.
 

Being equity funds, these schemes can generate good returns for investors over long term. If you invest regularly through systematic investment plans (SIPs) you can earn better returns compared to other tax saving products.
 

In the past five years as well as 10 years, this category has created wealth for investors with average returns in the range of 16% to 18%.
 

However, you have to understand that the potential to earn high returns comes with high risks. These funds can even give negative returns when markets are volatile and are in the red. Though most tax saving schemes can get better returns than the broader index, there are many schemes that have lost 12% to 14% in the last one year.

Therefore, If you have the patience to stay invested for a longer duration and can face volatility should consider this option.
You should avoid the dividend reinvestment option for ELSS schemes because the lock-in period will prevent them from exiting fully. Their best option is to take the SIP route since the start of the year.


Must Read : Top 3 ELSS Tax Savings Funds in India to Invest via SIP

UNIT-LINKED INSURANCE  PLANS (ULIPs) AND LIFE INSURANCE POLICIES
 

Unit-linked insurance plans (ULIPs) are a category of goal-based financial solutions and are long-term plans offering you the dual benefit of insurance and investments. 

In ULIPs, a part of the investment goes towards providing for your life cover. The remaining portion of the ULIP is invested in a fund, which, in turn, invests in stocks or bonds, the value of investments alters with the performance of the underlying fund opted by you. 

There are options for you like investing in equity, debt balanced or corporate bonds. However, insurance plans have their own pros and cons. So, you must research well before investing in insurance policies and not jump merely with the intention to save taxes by investing in such products. 

You should ascertain whether the plan meets your goals. Also, you should evaluate the performance of previous ULIPs. Additionally, you should find out if they are single or regular premium ULIPs. Consider choosing a policy tenure of at least 15 years, which can give good amount of money.

It is always seen that investors disband their insurance policies and not complete their full term, which impacts their savings. It is always advisable to either pay premiums for the full term or take other life insurance policies. While investors who want to look at other insurance products should also look at investing in term insurance, endowment or retirement plans that offer tax benefits under the Income-tax Act.
 

Must Read : How much Insurance do you need ?

In India, life insurance still remains the most preferred tax-saving  instrument and many believe that by paying insurance premium they save taxes as well as money for their retirement purposes. But you should invest only if you are sure of what returns you will get after the investment matures. You should always remember that investing in life insurance policies should not be made only to avail tax benefits but to get life benefits also. The main aim of an insurance product is to ensure a financially-secure future for your family members.
 

Finally, remember that before buying any investment product such as ULIPs, endowment or money back policy, you should always calculate your need for insurance. If you do not believe that insurance can fulfill you needs, then they can certainly invest in a term plan and the remaining money can be put in ELSS through SIPs, which can offer both tax advantage as well as exposure to the equity markets.

Must Read : Mutual Funds Vs ULIP 


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Who doesn't like a financial healthy life,In case if you want one contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you

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Disclaimer  :-


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