Tax Saving Schemes: Public Provident Fund (PPF), SCSS, NSC, SSY and other investments with no stock market exposure

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Updated: March 19, 2020 3:23:52 PM

Investment options to save income tax: A few fixed-income investments that also come with Section 80C tax benefits, considering the tax-saving season is closing on March 31.

Public Provident Fund, PPF, SCSS, SSY, NSC, income tax saving, Section 80C, tax free, mutual funds (MF), SIP, stock marketSave Income Tax: Continuing with mutual funds SIP is what most financial planners are suggesting even in these times of enhanced volatility.

Save Income Tax 2020: With the stock market indices and stock prices falling like ninepins, investors are already finding themselves floating in troubled waters. The talk of global recession is firming its grip even while central banks of different countries have initiated taking measures to avoid any liquidity crunch.

For a long-term investor of mutual funds (MF), the silver lining is that lower NAVs fetch them more units of MFs, which over time may generate better returns. Therefore, continuing with mutual fund SIP is what most financial planners are suggesting even in these times of enhanced volatility.

However, those investors who are looking for a fixed return on their investments and are not ready to take any negative return on their capital, there are fixed-income investments to look at. Here, we consider a few of them which also come with Section 80C tax benefits, considering the tax-saving season is closing on March 31.

1. Senior Citizen Savings Scheme (SCSS)

If you are above age 60, Senior Citizen Savings Scheme (SCSS) suits you as it comes with a guaranteed return for 5 years, which can be extended after maturity for 3 years. Currently, the interest rate on SCSS is 8.6 per cent per annum, interest being payable on a quarterly basis. The maximum investment in SCSS is capped at Rs 15 lakh.

2. Public Provident Fund (PPF)

The sovereign guarantee that PPF enjoys on both the principal invested and interest earned is the clincher while the interest income also remains tax-free. On top of it, there is income tax benefit under section 80C on the amount invested in PPF. Therefore, PPF enjoys E-E-E- status as it comes with tax exemption at the investment stage, growth remains tax-exempt and even maturity remains tax-free. One other important feature of PPF remains largely ignored – Compounding of interest that happens annually in PPF.

The PPF being a long term scheme of 15 years, the impact of compounding is the best in PPF. The minimum and maximum annual investment in PPF is Rs 500 and Rs 1.5 lakh and PPF contributions need to be made each year for 15 years to keep the PPF account active.

3. Post Office Time Deposit (TD)

Currently, ( January 1 to March 31, 2020) the interest rate is 7.7 per cent per annum, payable annually but compounded quarterly. The post office time deposit (TD) in a post office is almost similar to a bank fixed deposit but one can deposit only for 1 year, 2 years, 3 years and 5 years. The deposit made for 5-year duration qualifies for the Section 80C tax benefit. The interest earned is fully taxable and to be added to one’s ‘Income from other sources’ as in the case of bank FD.

4. Tax saving Bank FD

Of all the fixed deposit tenure options in a bank, the 5-year tax-saving FD is a specific scheme that comes with tax benefit under Section 80C. If you are a taxpayer and want to take tax benefit on your investment in bank FD, the 5-year tax-saving FD scheme of banks could suit you. The investment made in the bank FD tax saver qualifies for tax benefit under section 80C and will, therefore, help you save tax. Currently, the interest rate is around 6 per cent, while for senior citizens, there is an additional rate of interest of 0.5 per cent per annum. Some Small Finance banks offer a slightly higher rate of return to investors. The interest rate can be had on a monthly, quarterly, half-yearly or annual basis in bank FDs.

5. National Savings Certificate (NSC)

The tenure of NSC is also 5 years but unlike bank FD and PO Time Deposit, there is no option to get regular interest payout, not even annual payments. The amount invested in NSC can be had only on maturity. The interest is taxable in NSC but the unique thing about NSC is that the interest accruing annually during the first 4 years is deemed to be re-invested and thus qualifies for tax benefit under section 80C. Currently, NSC interest rate is 7.9 per cent per annum compounded annually but paid on maturity. Illustratively, Rs 1 lakh invested in NSC grows to Rs 146250 after 5 years.

6. Employees’ Provident Fund (EPF)

For a salaried employee, 12 per cent of the basic salary goes into the employees’ provident fund (EPF )while a matching contribution is made by the employer. The monthly contributions made towards EPF qualifies for tax benefit under Section 80C. For example, if someone has a basic salary of Rs 25,000, the monthly contribution towards PF is Rs 3,000 ( 12 per cent of basic salary). So, effectively, the total annual PF contribution that qualifies for section 80C will be Rs 36,000. For the year 2018-19, the interest rate on employees’ provident fund (EPF) balance was 8.65 per cent while for the year 2019-20, the interest rate on employees’ provident fund (EPF) balance has been declared at 8.50 per cent, which is yet to be notified by the government.

7. Sukanya Samriddhi Yojana (SSY)

Sukanya Samriddhi Yojana (SSY) scheme is aimed at the financial needs of a girl child, with the contributions qualifying for tax benefit under section 80C while the interest earned is tax-free. Currently, the interest rate is 8.4 per cent per annum, compounded annually and paid on maturity. The age of the child has to be below 10 years, while the scheme matures when the child attains 21 years. The SSY deposits made by the parent has to be only for the initial 15 years. The SSY rules allow the scheme to be closed after the child becomes 18 years of age provided it is only for the purpose of marriage.

8. Life insurance – Endowment

Unlike Ulips, the endowment and money back life insurance policy issued on or after April 1, 2012, qualifies for Section 80C tax benefit, if the premium paid exceeds 10 per cent of the sum assured, then the deduction (from the gross total income) will be available to the extent of 10 per cent of the sum assured and the premium paid in excess of this amount cannot be claimed as a deduction. Even the benefit under Section 10 (10D) – maturity being tax-free- will hold true only when for policies issued on or after April 1, 2012, the premium amount in any financial year does not exceed 10 per cent of the actual capital sum assured.

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