Investments that aid tax savings

The best method to reach financial independence is through maximum savings and the least amount of tax payout from your income. The maddening chaos that ensues every year in February for people with regard to deciding upon tax saving instruments and investment products can be reduced with a little bit of research. Remember, investments only for tax saving purposes are not advisable.

Let's look at some investment options in the order of their risk factors, tax savings and returns.

Topics

1. Bank Fixed deposits
2. Public Provident Fund (PPF)
3. National Savings Certificate (NSC)
4. Infrastructure Bonds
5. Life Insurance Schemes
6. Equity Linked Savings Scheme (ELSS)
7. Unit Linked Insurance Plans (ULIPS)

Bank Fixed Deposits

In a fixed deposit saving scheme a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest (currently between 8% and 10% depending on banks). When you want to invest your hard earned money for a longer period of time and get a regular income, a Fixed Deposit Scheme is ideal. It is safe, liquid and fetches high returns.

Public Provident Fund (PPF)

Given its safety (its government backed) with relatively high returns (currently 8 % p. a. compounded annually) and tax exemptions on its interest earnings and the final corpus; its effective post-tax return currently works out to above 11.57% (for someone paying 30.9% tax). Given its Rs. 500 per year minimum investment stipulation, with one contribution allowed every month, you can even invest small amounts for your long-term.  However, the money is locked in for 15 years.

National Savings Certificate (NSC)

The National Savings Certificate — popularly referred to by its acronym NSC — is a post-office savings scheme. Backed by the government, it is one of the safest investment options. The minimum amount is Rs 100, with no upper limit on investment. NSC is for a much shorter duration of 6 years from the date of investment. You get 8% p. a. compounded half-yearly (twice a year). However, NSCs are taxable under the head 'income from other sources'.

Infrastructure Bonds

Through Infrastructure Bonds India or Tax-Saving Bonds an investor can save on taxes as provided under Section 88 of the Income Tax Act, 1961. Though the interest is taxable, you can claim exemption from tax to the tune of Rs. 15,000 under Section 80L. The maximum investment is Rs. 1 L. The lock-in period is of 3 years and the returns work out to 5% - 6% or 8.7% - 11.71% if the tax break is taken into account. This interest is taxable.

Life Insurance Schemes

When buying insurance, keep one thing in mind, look to maximize your cover, not returns. The maximum investment depends on the terms of the policy. The total premium paid has to be within the Rs 70,000 limit of rebate under Section 88. The lock-in period and the returns depend on the scheme and its tenure.

Equity Linked Savings Scheme (ELSS)

ELSS as the name clearly suggests is a savings scheme linked to equity markets.  The minimum amount of Rs. 5000 is locked in for three years. Although, ELSS gains are linked to the market performance, it has been seen that they yield healthy returns.  From March 31st, 2006 the investment limit in ELSS has been increased to Rs.1, 00,000/- and this entire investment is eligible for deduction under sec 80C of Income tax Act, 1961.

Unit Linked Insurance Plans (ULIPS)

ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities. Investments in ULIPs attract tax benefits under Section 80C. The returns and the lock-in period depend on the plan chosen.

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