It is important for a salaried employee to choose tax-saving investments carefully. There are five popular tax-saving investments that one may choose from-EPF, PPF, tax-saving FDs, NPS and ELSS. Among these five tax-saving investments, EPF, PPF and tax-saving FDs are debt investments carrying a fixed rate of interest. While EPF, a mandatory investment for salaried, carries the highest interest rate, PPF is a 15-year investment option that also offers tax-free interest. PPF can be extended in a block of 5 years and hence can supplement EPF for one’s long-term goals. For goals that are around 5 years and if you are looking for a fixed return, tax-saving FDs may be suitable for the salaried. One may also consider NSC as it has a 5-year tenure, and can be bought just by making a visit to your nearby post office.
Here are some important features of the top 5 tax-saving options for salaried employees:
1. Employee provident fund (EPF)
For the year 2018-19, the interest rate on employees’ provident fund (EPF) balance is 8.65 per cent. The contributions enjoy tax benefit under section 80C while the growth is tax-exempt and even the maturity amount on retirement or on withdrawal after a continuous service of five years is tax-free. For taxation purpose, employee provident fund enjoys E-E-E tax status. As an employee, one can increase the PF contribution to 100 per cent of basic salary, from the mandatory 12 per cent limit. In such a case, it will be called voluntary provident fund and will carry similar tax benefits as EPF.
2. Public Provident Fund (PPF)
PPF account can be opened with Rs 500, while the maximum one can invest is Rs 1.5 lakh in one financial year. As a parent one can open another PPF account in the name of a minor child but the maximum taken together cannot exceed Rs 1.5 lakh. To get the interest amount for the entire month, make sure you invest on or before 5th of the month. Currently, for the quarter January to March 2020, the interest rate on PPF is 7.9 per cent compounded annually.
3. Tax saving mutual funds – ELSS
ELSS is the tax saving mutual fund scheme available with all mutual fund houses. ELSS is the only tax saving option that has the shortest lock-in period of three years. Your investment in ELSS will help you get tax benefit under section 80C and will be primarily invested in the equity market. The ELSS funds are varied with different proportion of allocation in several industries and across market capitalisation.
4. National Pension System (NPS)
NPS is a retirement-focused scheme with maturity at age 60. Among the fund options available in NPS, the maximum one can invest in an equity fund is 75 per cent of contribution while the balance can be put in debt funds. The tax benefit is available Section 80CCD(1) wherein the deduction can not exceed an amount equal to 10 per cent of the Basic Salary. Over and above Section 80CCD(1), one can additionally invest up to Rs 50,000 under Section 80CCD(1B). At age 60, one can withdraw a maximum of 60 per cent of corpus which is tax-exempt while on the balance one starts getting pension.
5. Tax saving bank fixed deposit
The tax saving FD is available with banks and carries a fixed interest rate. The tenure is 5 years and does not allow any partial withdrawal before the lock-in period ends. One can open tax saving FD online in the bank where one holds the account. The interest rate is similar to the rate of interest offered on the bank’s regular 5-year tenure FD.
What to do
Tax saving exercise should not be an isolated activity. Do not invest merely to save tax. Rather, link your investment in tax saver to your long term goals. Based on your risk profile, see how ELSS fits in your tax planning and ideally make higher use of it. For a salaried individual, while EPF is an involuntary saving, thereafter, diversify across ELSS, PPF and if there are medium-term goals, choose between bank tax-saving FD or NSC.