Tax Saving

There are some legitimate ways of saving taxes and the good thing is that most of them also help you grow your wealth. These options usually have a lock in period and vary in the nature and amount of return they provide.

ELSS or Equity Linked Saving Schemes, are a kind of equity-linked mutual funds. As they invest in equity or stocks, ELSS funds have the ability to deliver superior returns - 14-16% over the long term.

  • ELSS funds have a lock-in period of only 3 years – the lowest amongst the options available.
  • The return from ELSS funds is also tax-free.

Your PPF investments earn interest at a rate announced every year – currently 8.7%. PPF return is therefore mostly at par with inflation. However, it is tax-free and you can do a lump sum or small regular investments.

  • The duration of a PPF account is 15 years which is extendable by 5 years at a time. You cannot withdraw money from your PPF account except under certain conditions but not before 5 years.
  • You can invest in PPF through a bank or Post Office. Ability to invest online is limited.

This is a variant of the regular Bank FD with a 5-year lock-in. They offer slightly higher interest rates compared to normal FDs (0.25-0.5% higher) but does not offer liquidity option- even premature withdrawal with the penalty is not possible.

  • The interest you earn on your 5-year bank FD is fully-taxable and you will have to pay taxes on a yearly basis for the interest you earn for that period.
  • TDS typically collected by banks is only 10% (20% in case you have not submitted your PAN) and if you happen to be in the 20 or 30% tax bracket, you need to pay the remaining interest while filing your IT returns.

NSC interest rates are fixed in April every year. The current rate is 8.5% for 5-year lock-in NSCs, and 8.8% for 10-year lock-in NSCs.

  • The interest accumulated is fully taxable. However, one key difference here is that the interest amount is not paid out to the investor.
  • Instead, it’s re-invested in NSC and therefore can be considered as your investment in NSC for the subsequent year.

Pension funds are designed to provide you with an income stream post retirement. They come in two flavours: Deferred Annuity and Immediate Annuity.

  • For deferred annuity plan, you invest annually until your retirement. Once you reach your retirement, you have can withdraw up to 60% of your accumulated corpus and have to re-invest the remaining in an annuity fund which will give you a monthly pension.
  • When it comes to immediate annuity plans, you invest a bulk amount one-time and get monthly pension from the next month itself. You would typically use these to invest your retirement corpus.

Tax-saving is an important part of financial planning. An intelligent tax-planning strategy can serve the dual objective of helping individuals meet their financial goals and save tax in the process.

There are some legitimate ways of saving taxes and the good thing is that most of them also help you grow your wealth. These options usually have a lock in period and vary in the nature and amount of return they provide. You must also remember that each of these alternatives also serve specific purposes and tax saving is not the purpose but an ancillary benefit of that.

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