As an investor, one of the best things that should get to your mind when trying to choose an investment option is the tax charges such an investment attracts. It is essential that you look for an investment that does not save tax, but will generate an income that is tax-free.
It is necessary to consider certain factors like safety, returns and liquidity when choosing the right tax saving investment. Knowing how the returns will be taxed is equally important; because taxes in some investments options can eat up much of the returns.
In most of the tax-saving financial products like Senior Citizens’ Saving Scheme (SCSS), National Savings Certificate (NSC) and long-term bank deposits, the overall interest on the income over the maturity period and the income will be taxed.
In the first year, they may help you save tax but the tax liability takes hold on the income each year until it matures. It is important to know that tax savers instruments will save the tax to a specified limit on investments and maturity.
There are some tax exemptions investments on both income and interest added as provided by the tax exemption rules which are very suitable for those with income which does not exceed Rs 3lakhs. Section 80C on the Income Tax Act of 1961 provides rules on the principal invested while Section 10 of the Act states the conditions of exempting tax on all the incomes.
This article will provide you with information on tax free investments and how you can earn tax free income on investment.
WHAT IS A TAX-FREE INVESTMENT?
Tax free investments are those investments whose income generated at the time of maturity are exempted from tax. Such income is referred to as tax free income. Profits made from investments are considered as earnings which is liable to be taxed by the government.
It is not all earnings that are taxed, and there are incomes that are free from tax.
LIST OF TOP TAX-FREE INVESTMENT OPTIONS
These are the list of the top investments which are not taxable at the time of their maturity. The profits which accrue to these investments are not added to the taxable income.
|1.||EPF Account||Retirement saving||8-9%||Very low||Investment
|2||PPF Account||Long- term||7-8%||Very low||Investment
|15-year lock in
Loan & partial
|3||Shares and Equity Fund||Long-term||12-16%||High||Investment (ELSS)
|1-year for benefit
3-year lock-in for ELSS
|4||Life Insurance Policy||Insurance product||4-6.5%||Low||Investment
|5||Saving Account||Savings||3.5-6%||Low||Interest (up to INR 10,000)
|8||National pension scheme||Retirement saving||NA||NA||NA||NA|
|10||Senior Citizen Savings Scheme||Savings||9.2%||Low||Maturity||5 years lock in|
|11||National Savings Certificate||Savings||8.4-8.8%||Low||Maturity||5-10 years|
|12||Will and Inheritance||One Time gain||NA||NA||NA||NA|
|13||Gift on Marriage||One Time Gain||NA||NA||Full Gift||NA|
EMPLOYEES PROVIDENT FUND (EPF)
Employees’ Provident Fund (EPF) is incorporates an avenue for a salaried individual to earn tax free income through involuntary savings. An employee will contribute 12 percent of his monthly’s basic salary towards his EPF account. The employer contributes a portion of 3.67% into the EPF account. It comes with the employee pension scheme which implies that the employee also gets pension on retirement.
Section 80C of the Income Tax Act of 1961 provides that the employee’s contributions qualify for tax exemptions within the limit of Rs 1.5 lakh a year exception of the employer’s share of the contribution. The interest that accrues in a year for this contribution is tax free.
The interest rate for EPF has been reviewed in the 2017-2018 financial year which stands at 8.55% which is slightly less than that of 2016-2017 year which was 8.65%.
There is a provision which allows one to increase his contribution to 100% and is called Voluntary Provident Fund (VPF). The VPF is the same thing as the EPF; both have the same rules and is tax free provided the employee stays in the job for the next five years.
You can opt-out of VPF after reaching an agreement with your employer; but the contributions which provides additional savings for your retirement cannot be withdrawn within the same period with EPF because it is kept locked for a longer tenure.
FACTS ABOUT EPF
- The scheme offers all round tax benefit.
- The account generates a non-taxable interest yearly.
- Full maturity amount is tax free.
- Tax benefits can be lost if you withdraw before five years.
- They offer better interest than bank deposits.
- It is mandatory to all private sector employees.
- You can withdraw your EPF balance after seven years in the system.
- You will be given a User Account Number (UAN) which remains same even after changing the job.
PUBLIC PROVIDENT FUND (PPF)
Public Provident Fund has been the favorite avenue for investors to save and earn tax free income. The principal and the interest are guaranteed to be tax free. it is equally a retirement saving scheme but is open to the public. You can open a PPF account in post office and in banks.
You can open a PPF account in your name or unbehalf of a minor if you are the guardian. The minimum amount required to maintain the account is Rs 500 and the amount that can be deposited within a year must not exceed Rs 1.5lakh.
FACTS ABOUT PPF
- The interest rate is subject to change every three months.
- It offers an interest rate of 7.6% per annum.
- It is a 15-year scheme but can be extended indefinitely in blocks of 5 years.
- it is for investors with littles interest in a volatile return.
- The investment offers all round tax-free benefits.
- Although it offers a lower interest compared to EPF, it’s return pays higher than bank deposits.
- It has same interest rate as National Savings Certificate.
EQUITY-LINKED SAVINGS SCHEME (ELSS)
Equity-linked savings schemes (ELSS) are a form of equity mutual funds with outstanding features which allow for tax exemptions under Section 80C of the 1961 Income Tax Act. Tax saving benefits differentiates ELLS from the regular mutual funds.
A share allows you to become a co-owner of the company and the value of your share is proportional to the value of the company. Mutual funds allow you to invest in bonds and shares through financial experts.
ELLS allow you to invest in shares but offers tax benefits. It is a type of equity mutual funds.
Since the 1st of April 2018, gains made from ELSS which is more than Rs 1lakh per annum receives a tax of 10% while gains below this limit is exempted from tax.
The performance of ELLS determines the return which is dependent on the equity market.
It has two options which include growth and dividend. Dividend is intended for those who seek regular income while growth is for long term savings.
However, choosing growth options over the dividend option yield more tax-free returns.
FACTS ABOUT ELSS
- Capital gains below Rs 1lakh are not taxed.
- You can lose your gains if there is a downturn in the equity market.
- Ensure to invest in good companies to get qualitative results.
- To get the tax benefit, you must stay in the investment for a year.
- Investment in ELLS helps you to save for long-term goals and equally get tax free income.
UNLINKED INSURANCE PLANS (ULIP)
Unlinked Insurance Plans (ULIP) is made up of two products which are combo protection and savings. ULIP offers insure your life and offers market investment savings for meeting long term goals. The insurance scheme offers you tax exemptions with deductions specified under section 80C of the 1961 Income Tax Act.
ULIPs offer different fund options with equity and debt having variations in asset allocations. They are not pure investments; thus, they have a much lower interest rate. Despite its seemingly low interest rate, it offers higher returns than a bank deposit.
FACTS ABOUT ULIP
- The insurance is long term of 15-20 years with a lock in period of 5 years.
- It is very difficult before one can get funds out of the scheme.
- Any switching between the fund types within the holding period is tax free.
- Investors who are comfortable with ELSS and at the same time is engaged in a pure insurance plan should not opt for ULIP.
- Care must be taken to ensure that the funds invested are not meant for immediate purposes.
- Exiting the scheme after 5 – 7 years could bring negative consequences.
INTEREST IN SAVING ACCOUNT
This is the most common type of tax free investment option. Opening a savings account can take place in a bank or a post office. It is a normal savings account which permits you to deposit and withdraw your funds any time.
In default, the interest that accrues to bank deposits is taxable and is added to your total’s taxable income for the year. The amount of tax charged on your bank deposits depends on the size of your income. Interest that is below Rs 10000 will not be taxed by the government.
It might interest you to know that tax benefits can only be enjoyed if file the statement of your savings account interest in a separate column.
FACTS ABOUT INTEREST ON SAVINGS ACCOUNT
- The interest rate is very low usually between 3-6%.
- Withdrawals and deposits can be made any time.
- The account is very easy to operate.
- There is a penalty when you fail to maintain the minimum balance in the account.
- You will be provided with a debit card which usually attract maintenance fee; and is renewed periodically.
SUKANYA SAMIRIDDHI YOJANA (SSY)
This is a deposit scheme specifically launched for the girl child as part of the ‘Beti Padho’ campaign. It provides income tax benefit and has an interest rate of 8.1%.
A Sukanya Samriddhi Account can be opened anytime between the time of her birth and the 10th birthday. It accepts a minimum deposit of Rs 1,000 and a maximum of Rs 1.5 lakh. The account can be operated for a period of 21 years; starting from the date of its opening until the girl is 18 or is married.
Presently, the account offers the best tax-free return with a guarantee.
FACTS ABOUT SUKANYA SAMIRIDDHI YOJANA (SSY)
- It is set up to encourage the importance of the girl child.
- It offers the highest tax-free return on investment.
- The account can only be operated within a period of 21 years.
- Its carries the exempt-exempt-exempt (EEE) status.
Health insurance is incorporated to protect the life and wellbeing of an individual or his family and can be used as an important tax saving scheme. Under section 80D of the 1961 Indian Tax Act, the premiums paid on the health insurance can be claimed for tax deductions.
FACTS ABOUT HEALTH INSURANCE
- The maximum amount that can be saved on health-related expenses is Rs 40000.
- The money claimed after its maturity is totally tax free.
- The premium paid must not exceed 20% of the guaranteed claims; exception of which will not tax free.
NATIONAL PENSION SCHEME
This is regulated by the PFRDA and is designed to enable all categories of workers to save for their retirement. In many districts, it is not widely used as a tax saving instrument, but it has the capacity of securing one’s life after retirement. Section 80C of the Indian Tax Act 1961 provides deductions for the National Pension Scheme.
FACTS ABOUT THE NATIONAL PENSION SCHEME
- It can only be assessed on retirement.
- Any Indian citizen between the age of 18 to 60 can partake in it.
- The maximum deduction is Rs 1.5lakh
Pension is a life insurance scheme but it serves a unique purpose. Most long-term protection plans are set up to secure the family of the individual financially after his death, pension plans will cater for the individual financially if he lives.
FACTS ABOUT THE NATIONAL PENSION SCHEME
- It can only be assessed on retirement.
- The maximum deduction is Rs 1.5lakh
- It is exempted from tax.
SENIOR CITIZEN SAVINGS SCHEME (SCSS)
This is sponsored by the government with the aim to provide financial security to the senior citizens. Investors can make a onetime deposit amount ranging from Rs 1000 to Rs 15 lakhs for partnership and Rs 9 lakhs for single account. It is the best tax saving scheme for senior citizens because it provides regular and reliable interest.
FACTS ABOUT SCSS
- It is for individuals from 60 years and above.
- It has a lock in period of 5 years.
- Interest rate is 9.2% and is compounded every quarter of the year.
NATIONAL SAVINGS CERTIFICATES (NSCs)
NSCs is more like banks deposits form of investment but its interest rate is lower. Since the funds in the National Savings Scheme are in the custody of the Indian Government, they are a safer option for investment than bank deposits. Deductions on taxes for this scheme is provided in Section 80C of the Indian tax Act.
FACTS ABOUT NSCs
- The interest is taxable; but claims on tax deductions depends on how long one stay in the scheme.
- Interest rate for 5 years is 8.5% and 8.8% for 10 years.
MONEY RECEIVED THROUGH WILL AND INHERITANCE
Any money received from WILL or Inheritance is absolutely tax free in India. It is only if you invest the money that the interest earned will be taxed.
MONEY GOTTEN BY GIFT ON MARIAGE
Any amount of money gotten as gift on marriage is exempted from tax. Any gift of money received before and after the day of the marriage will be taxed.