Tax-planning for the risk-averse investor
The reason why we encourage investors to take tax-planning seriously is because it not only saves you tax, but it permits you to invest in avenues that are well-suited to your risk profile and investment objectives. So in a simple stroke, you have achieved two important objectives - tax-planning and financial planning.
As you have probably already read in this guide, Section 80C is nothing short of a boon to tax-payers. The Section embraces a variety of investment options ranging from tax-saving funds to life insurance to assured return schemes. The latter is of particular interest to us and forms the subject matter of this note.
If you are risk-averse and wish to evaluate the most suitable tax-saving options, there is plenty to choose from. In this note, we profile three investment avenues from the assured return schemes segment that you can consider adding to your tax-planning portfolio.
1. Public Provident Fund (PPF)
Investments in PPF are of a recurring nature and run over a 15-Yr period. Investors are required to make annual contributions to keep their PPF accounts active. The minimum and maximum investment amounts are Rs 500 and Rs 70,000 per annum (pa) respectively. Only contributions upto Rs 70,000 pa are eligible for a tax benefit. Any amount invested over the aforementioned sum is returned without interest. At present, investments in PPF earn a return of 8.0% pa, compounded yearly. It should be noted that investments in PPF offer an assured return, but the rate of return is subject to change. Hence you could find your investments earning a lower or higher return, depending on how the interest rates are revised.
Liquidity
PPF scores poorly on the liquidity front. Withdrawals are permitted only from the seventh financial year. Also, the amount that can be withdrawn is a factor of the balance in the PPF account in the earlier years.
Tax implication
Apart from Section 80C tax benefits at the time of investing, interest income from PPF is exempt from tax under Section 10(11) of the Income Tax Act.
Who should invest
With a 15-Yr investment horizon and the stipulation for making annual contributions, PPF can become an ideal avenue to build a corpus to meet your long-term needs like retirement or children's education.
2. National Savings Certificate (NSC)
NSC offers the opportunity to make lump sum investments for a 6-Yr period. The minimum investment amount is Rs 100, while there is no upper limit. Presently, investments in NSC earn a taxable return of 8.0% per annum, compounded on a half-yearly basis. Hence Rs 100 invested in NSC will grow to Rs 160.1 on maturity. The rate of return is locked in at the time of investment. Hence investments are insulated from any subsequent change in rates.
Liquidity
NSC scores poorly on the liquidity front. The interest income is received on maturity. Furthermore, premature withdrawals are only permitted under specific circumstances like death of the holder(s), forfeiture by the pledgee or under court's order.
Assured Return Schemes
| |
PPF |
NSC |
Tax-saving FDs |
| Coupon rate (pa) |
8.00% |
8.00% |
8.00% |
| Interest frequency |
Compounded annually |
Compounded half-yearly |
Compounded quarterly |
| Effective rate (pa) |
8.00% |
8.16% |
8.24% |
| Interest receipt |
On maturity |
On maturity |
On maturity |
| Tax benefit on investment |
Deduction under Section 80C |
Deduction under Section 80C |
Deduction under Section 80C |
| Tax benefit on interest earned |
Exempt under Section 10 |
Eligible for deduction U/S 80C |
Nil |
| Tax rates |
Post-tax returns* |
| Nil |
8.00% |
8.16% |
8.24% |
| 10% |
8.00% |
7.32% |
7.39% |
| 20% |
8.00% |
6.48% |
6.54% |
| 30% |
8.00% |
5.64% |
5.69% |
*Education cess charged at 3.00% has been considered while computing post-tax returns. pa: per annum
Tax implication
Interest income on NSC is chargeable to tax. However, the interest accruing annually is also deemed to be reinvested, hence it qualifies for deduction under Section 80C.
Who should invest
Given that the rate of return is locked-in and that the investments run over a 6-Yr time frame, NSC can be used to gainfully invest one-time surpluses and to provide for needs that will arise over a corresponding timeframe.
3. Tax-saving fixed deposits
Tax-saving fixed deposits are conventional fixed deposits offered by banks; however investments therein (upto Rs 100,000 pa) are eligible for tax benefits under Section 80C. These fixed deposits have a locked-in investment tenure of 5 years and the minimum investment amount is generally Rs 100. At present, most banks offer a taxable rate of return in the range of 8.0%-8.5% pa. A higher rate of return (additional 0.5%) is offered on investments made by senior citizens.
Liquidity
Premature withdrawals are not permitted. However, investors can choose the regular interest payout options (subject to the same being offered by the bank) for liquidity.
Tax implication
Interest income from tax-saving fixed deposits is chargeable to tax. Also unlike PPF and NSC, the same is subject to TDS (tax deduction at source).
Who should invest
Investments in tax-saving deposits have a locked-in return and a pre-determined investment horizon. You can align your investments with your future needs.
As can be seen, the assured return segment has a wide range of investment avenues to offer. The onus for making the right choice and getting invested in an apt instrument lies with you.
