As an income tax assessee, you are entitled to reduce your tax outflow through legitimate means provided by the Income Tax department. The IT department offers you the benefit of saving tax in the form of exemptions under Section 80C of the Income Tax Act. There are various products and tax saving schemes that are extremely popular in India. Here are 5 schemes that are extremely popular in India and have been existence for a fairly long time. Also in terms of performance and returns these products have stood the test of time.
Public Provident Fund (PPF)
If you are safe player in the investment world, then PPF gives the advantage of above average returns and also tax efficiency. This comes with total safety of principal as it is guaranteed by the government of India. It offers an ultra-safe option for people to reduce their tax. It scores high on parameters such as security and overall cost. The returns on PPF are now substantially lower than before as the rates have been revised multiple times, the safety it offers to your investments is almost unmatched. The current interest rate of 8.0% is still substantially better than what you would get on a bank FD. Also the PPF is tax free at 3 levels. The investment qualifies for exemption under Section 80C, the interest accrued is free of interest and the redemption is also tax free. The only challenge is the long tenure till maturity, which is currently 15 years in case you want to make complete withdrawal, while partial withdrawal is allowed from the 6th year onwards. You can get a loan against your PPF from the 3rd year onwards.
Equity linked savings schemes (ELSS)
Equity Linked Savings Schemes is a combination of good returns, tax efficiency and also long term wealth creation. That is where it really scores; in wealth creation. ELSS funds invest primarily in equity trading and related products and as such, the returns fluctuate in line with the movement in equity market. Despite a slightly higher risk, ELSS is unmatched as a tax saving option due to its EEE status. Investors can invest as low as Rs.500 at one time and the lock in period is just 3 years. The liquidity factor increases if you opt for the dividend option instead of the growth option, although it will mean that you lose out on the reinvestment benefits. Hence we do not recommend the dividend option normally. In case you want lower costs, you can opt for direct plans have lower fund management costs, giving the funds even higher growth potential. You can buy ELSS like any normal mutual fund.
National Pension Scheme (NPS)
National Pension Scheme is a recent launch but it is expected to become more popular among investors with time. What could drive acceptance of NPS among investors is the option to choose the type of asset class (equity, debt, balanced) to invest in it. The NPS gives you the option to choose and invest among three different categories: E, C and G. E-Class or equity investments offer higher risks but potentiality better returns. C-Class offers you fixed income instruments that are relatively more stable in terms of returns and safety of funds. G-Class or central and state government bonds or gilt funds feature low risks with corresponding low returns as well. This is more of a long term corpus creation and regular annuity income generating machine.
Unit linked insurance plan (ULIP)
Should you buy insurance or mutual funds to save tax? What should be your focus; risk cover or wealth creation? Can you get both in a single product? The answer is you can! Unit Linked Insurance Plans are a mix of insurance and securities investments. After being controversial for their lack of transparency, ULIPS have seen considerable reductions in administration charges. Unlike ELSS funds that mandatorily need to invest a major portion in equities, ULIP offers you the option to choose among debt, equity or a mix of the two. Being an insurance product it also enjoys benefits under section 10(10D) of the IT Act in addition to section 80C tax saving benefits. The only thing is that ULIPs entail higher costs in the initial years. Don’t think of a ULIP unless you are having a time perspective of at least 8-10 years. That is the time it takes to cover your costs and create wealth above that.
Insurance coverage is still the major choice
One of the most popular tax saving schemes in India have been insurance policies. While in the past, the focus was on endowment policies, the focus today is more on term policies. Some advantages such as bonus (reversionary and/or terminal) found in case of endowment plans and the ability to take loans against a policy as in case of life insurance plans, make them an easier option for people to understand. Also, the backing of LIC means stability and pan-India presence of LIC has been an added advantage. While the debate is on between term policies and endowments, we believe that the focus should on term policies to cover your risk and on mutual funds to create wealth.