One of the most common financial mistakes people commit is choosing the wrong tax-saving instrument. While there are scores of tax-saving avenues in the market, good financial planning involves selecting those that are best suited to your needs so that they not only reduce the tax burden, but also benefit you financially.
Public Provident Fund: PPF is one of the most popular tax-saving instruments. Now that PPF interest rates have been linked to bond yields in the secondary market, they offer returns at par with other instruments. While the maturity amount as well as interest earned on PPF are tax-free, the ease of opening an account and liquidity are a plus. PPF is especially suitable for low-risk investors.
Equity-Linked Savings Schemes: ELSS are a more risky proposition than PPF. With good returns and a tax-free status, ELSS play a crucial role in effective tax management. They have a three-year lock-in, which is among the smallest amid all instruments covered under Section 80C of the Income-Tax Act. Being an equity-linked fund, there is, however, no guarantee of returns as they mirror the stock-markets and the general financial sentiment.
Unit-Linked Insurance Plans: Ulips are market-linked insurance schemes that offer tax-saving options under Section 80C. Ulips offer advantages of life cover with investment in equity and debt markets, along with serving as a tax-saving instrument. The downside is higher premiums and discontinuation of policy if one takes a premium holiday. One can opt for a debt-market-linked Ulip and move to equity during a bull run.
Voluntary PF: Voluntary Provident Fund (VPF) is a lesser known tax-saving instrument, but quite as useful. Designed as an extension of the Employees’ Provident Fund, a voluntary PF account can be created with the help of an employer in each financial year. Once initiated, the employer will deduct 12% of the basic and dearness allowance from the salary and transfer it to the VPF account. The employer would also need to contribute 12% funds from his side to the EPF account. But VPF accounts offer very limited liquidity and funds cannot be withdrawn until one retires or quits