With the financial year coming to a close in less than three months, most taxpayers would be racing against time to invest in tax-saving schemes to reduce of some of the tax burden.
While there are many schemes eligible for tax-saving purposes, the most popular are the Provident Fund/Public Provident Fund, life insurance and equity-linked savings scheme (ELSS).
An investor can get tax exemption under Section 80C of the IT Act for investments up to Rs 1 lakh.
All these instruments offer the Exempt-Exempt-Exempt (EEE) benefit. It means in all the three stages — investment, accumulation and maturity — your money is exempt from tax.
Investments in these instruments are efficient, as they save tax not only at the time of investment, but also at the time of maturity.
Permi-ssible investments in National Savings Certificate (NSC) etc and deductions by way of savings on specified health insurance products, education expenses, interest payment or repayment of housing loan, house rent paid have not been considered, as they are either less efficient or they do not involve investment decisions.
Pf/ppf
The most popular investment, which is done almost involuntarily by salaried employees, is Provident Fund (PF) deductions. Savings in PF, and the more widely known Public Provident Fund (PPF), are long-term investment options which qualify for tax breaks. Such savings are high yielding and flexible.
The current interest rate on PF/PPF is around 8.5 per cent a year (8.6 per cent in PPF), compounded half yearly. The schemes offer the EEE benefit. The interest earned is tax free, yielding a post-tax return of around 11.4 per cent a year.
Investments in PPF mature at the end of 15 years. PF investments mature at the time of retirement or termination of service. After an initial lock in period of five years, however, PF and PPF offer loan facility, adding liquidity to the savings.
Life insurance
Another popular investment qualifying for tax exemption, is life insurance policy. These provide life cover adding to their attractiveness.
Insurance policies also have “EEE” benefits making the returns earned tax free. However, the returns on the insurance policy is non-specified. An insurance policy has low liquidity, and usually long lock-in period (10 years and above).
ELSS
An attractive tax savings option is Equity-Linked Savings Scheme (ELSS) offered by mutual funds. The proceeds of investment made in the ELSS are invested by the mutual funds, in equity shares of companies. ELSS has a compulsory lock-in period of three years, the lowest among all tax-savings schemes.
Investors can exit anytime after the initial three years, making it possible to time their exit, to when the market movements are favourable. “EEE” benefits are embedded in ELSS, making the returns tax-free. Returns are not pre-specified.
However, as equity has been observed to have generated higher real returns over the medium to long term, than other comparable instruments, investments in ELSS are expected to be more beneficial.
Except for PPF (permitted up to Rs 70,000), the three other options can be used for savings up to Rs 1 lakh, permitted under Section 80C. The combination mix must be decided on the basis of “risk appetite” and the maturity period chosen by the investor.
(The writer is the MD and CEO of IDBI Mutual Fund)
