With the financial year coming to end, it’s that time of the year when most people begin to look at filing their tax returns. For a long time, insurances and bank deposits had been the most popular tax saving schemes for people.
The most common tax saving schemes in India are:
House rent allowance: If a certain part of your salary is marked as House rent allowance and you pay rent you are eligible for a income tax deduction. The only catch is that you cannot use this if the house is owned by your spouse or children. The exemption cannot exceed more than 50 percent of your salary
Unit-linked Insurance Plans combine the benefits of life insurance policies with mutual funds and a very popular tax saving investment. A certain part of the premium is invested in securities and the balance is used to provide for life insurance. Yields earned on investments paid to the insured or nominee.
Investment plans are plans which let the investor invest by making fixed periodic investments. These plans operate like mutual funds and ensure that people do not require huge sums of money to invest and gain from India’s economic boom. For a sum as low as Rs 500 per month you could buy a Systematic Investment Plan (SIP). Some financial institutions offer a graduated plan where your SIP subscription gradually increases with time. The threshold for all these schemes can be from medium term to long term and the returns offered are on par or even better than bank deposits.
Equity linked Savings schemes are tax saving mutual fund schemes which carry an amount of risk. The returns on an ELSS are tax free. They have a mandatory lock-in period of three years and are regarded as long term assets.
Employee’s Provident Fund
12% of an employee’s salary is contributed towards EPF, which is exempt from income tax. Any contribution over and above the 12% limit by the employee towards EPF is considered as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit of Rs.1 lakh per annum.
In the last year the government has notified an additional deduction of Rs.20, 000 to the investors for investing in infrastructure bonds issued by notified organizations. This deduction is over and above Rs.100, 000 available under Section 80C. Infrastructure bonds offer an interest rate of about 8% and have a minimum lock-in period of five years.
FDs: They have always been a safe and secure option for investors but the proposal to tax the interest earned on an FD on maturity has left tax payers miffed. However, the recent hike in the interest rate of FDs by the RBI has ensured that in a 3-5 year scenario they are a very good option to invest in.
National Savings Certificates: The reduction in their term from 6 years to 5 years has ensured that more people will opt for this form of saving. The government also has plans to introduce a “super NSC” which has a term of 10 years. The current rate of interest of 8.6 percent makes it an attractive investment especially since the amount at maturity is not taxable.