|We are at the start of the financial year, though technically the month is about to get over. Here’s why you should start your tax planning right away and not wait till the end of the financial year, which will be March 2014.
If you have a Public Provident Fund (PPF) account, make your investment as soon as possible. The sooner you put it in, the higher the interest accumulation at the end of the financial year. You will still get the tax benefit under Section 80C even if you invest on the last day of the financial year, but you would have missed out on the interest accumulation.
Despite the fact that over the years the return has been falling, it is still a very good investment.
The return on PPF was initially 12% per annum and began to decrease keeping in sync with the declining interest rate scenario in the country. Now the return is reset at the start of every fiscal year (April 1) and linked to the yield on Central Government securities of comparable maturities. Even though the return is no longer fixed, it is guaranteed. The current rate is 8.7% per annum.
Since PPF is backed by the government, it offers the highest level of security one can get on any investment. A sovereign-backed instrument tops the list in terms of safety. Investments in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder. This investment is safe in more ways than one.
On the tax front, you get a tax deduction under Section 80C when you invest in this instrument and the interest earned is also tax free. The interest is added to the principal investment and the accumulated amount is exempt from tax on maturity.
If you struggle with cash flows, don’t put all your money at one go. The minimum investment under PPF is Rs 500/annum and it can go up to a maximum Rs 1 lakh. The amount does not have to be invested at one go but can be done in installments (maximum 12 in a year). Since the instrument has a tenure of 15 years, it is an excellent long-term savings vehicle.
Read: 10 PPF must-knows
Also under Section 80C, investments in tax-saving funds are eligible for a tax deduction. Instead of investing a lumpsum at the end of the year, start a systematic investment plan (SIP) in the equity linked savings scheme (ELSS) of your choice. These are diversified equity funds that offer a tax exemption under Section 80C up to an investment of Rs 1 lakh.
You get a tax break under Section 80C when you invest in a tax-saving fund. Once this tenure has been completed, you can continue to hold on to your investment. Even if you decide to sell your units on completion of the holding period, you will still not pay any long-term capital gains (LTCG) tax since LTCG tax in the case of equity is nil.
This scores high in comparison to other instruments like 5-year bank deposits, National Savings Certificate (NSC) and infrastructure bonds, all of whose returns are taxed.
The lock-in period is just 3 years, the lowest when compared to other tax-saving investments. If the 3-year lock-in does cause you a bit of apprehension, then you could opt for a dividend option. The dividends you get will be tax free.
Besides the tax benefit, the biggest pull of such an investment is the fact that it has the ability to beat inflation. The only way you can convert your savings into wealth is by investing in instruments where the return is higher than the rate of inflation.
Let’s say you invested Rs 4,000/month in Canara Robeco Equity Tax Saver (G) from April 1, 2009 to March 1, 2010 (12 months). The amount invested would be Rs 48,000. The return on the investment today would be almost 14% per annum, beating the return from any other tax-saving investment. And the return is not taxed either.
Here are the best ELSS to make your pick from:
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NSC & bank fixed deposits
In terms of tenure, the National Savings Certificate (NSC) and 5-year bank deposits do score a point. Their lock-in period is longer than that of the ELSS but much shorter than the 15 years of the PPF. When compared to ELSS, their return is assured.
However, while both are eligible for a deduction under Section 80C, the interest earned on both instruments is taxed.
The 5-year NSC offers a return of 8.5% per annum while the 10-year NSC offers 8.8% per annum. The 5-year bank deposit rate will vary from bank to bank. With regards to this bank deposit, this amount cannot be pledged to take a loan.
Read: PPF v/s NSC
- The limit under this section is Rs 1 lakh irrespective of how much you earn and under which tax bracket you fall under
- There are no sub-limits under this section
- The option of where to invest the entire amount is up to you, either in one investment or amongst various in the list
- Certain expenses are also included such as life insurance premium payments, principal home loan repayments and full-time education fees of children
- The Employee Provident Fund (EPF), a forced savings, also falls under this section and is a deduction that an employer makes from the employee’s salary towards the provident fund
- The investments mentioned above (NSC, PPF, ELSS, 5-year bank deposits) all qualify for a deduction under this section
Read: 7 easy tax steps for salaried employees