Use Tax Saving Schemes To Meet Long-Term Goals
Tax saving schemes comes in all shapes and sizes. Depending on your financial goals, your risk profile, the returns you are looking for and the lock-in period you are comfortable with, there is a tax saving scheme to fit your needs.
While Public Provident Fund (PPF), Voluntary Provident Fund (VPF) and Equity Linked Savings Schemes (ELSS) are the most popular schemes, there are many more schemes that allow for tax deductions under Section 80C.
The risk averse can choose from investments in instruments that offer a fixed rate of interest. These instruments usually have a lock-in period. Before investing, do check if the income is tax free or taxable.
The National Savings Certificate (NSC) is a popular instrument that can be used to meet your financial goals. "For instance, you can use the NSC to save for funds required for your child's education after five or 10 years,'' points out Arnav Pandya, certified financial planner.
NSCs are small savings instruments that have a five-year lock-in period with a rate of interest of 8.50% compounded six monthly but payable at maturity. The interest accruing annually is deemed to be re-invested under Section 80C of Income-Tax Act. However, bear in mind that the income at the end of five years is fully taxable.
"The scheme's popularity has taken a beating after the system of agents was done away with. Investors now have to go to the post office themselves,'' said informed sources.
Other post office schemes include the Senior Citizen Savings Scheme (SCSS) for senior citizens. The current rate of interest is 9.20% per annum payable quarterly.
Besides, there are also other time deposit schemes like the 5 year Post Office Time Deposit Scheme and the Banks best tax saving plan Fixed Deposits with a lock-in of 5 years that offer tax benefits under Section 80C of the I-T Act. The interest rates earned is in the region of 8-9% for such schemes but the income is taxable. The postal schemes and fixed deposit schemes are targeted at the ultra-conservative investors mainly.
For those who do not like plain vanilla life insurance policies, they can invest in Unit Linked Savings Schemes (Ulips). Apart from the life cover, you can also get the additional benefit of investments in equity instruments. The average return is in the range of about 8-10% but mind you, the returns are not assured and are market-linked.
Those who have an appetite for risk can invest in equity linked schemes called ELSS where the returns can be in the range of about 12-15%. "The advantage of investing in ELSS is that the dividends as well as the appreciation after 3 years is tax free,'' said sources.
The Rajiv Gandhi Equity Savings Scheme (RGESS) is one such scheme that was launched in 2012 to draw first time investors to the equity markets. However, the scheme has not been very popular among investors.
Besides, one can also invest in pension funds up to Rs 1.5 lakh in pension funds under Section 80CCC. However, bear in mind that the total deduction under Section 80CCC and Section 80C cannot exceed Rs 1.5 lakh.