The 11 Batsmen: Tax Savings Explained for the New Investor

February 22, 2021 7:29 PM

Tax Planning is a crucial aspect of your financial plan. Section 80-C and 80-CCD of the Income Tax Act have remained the most preferred options because they are simple to understand.

retirement planning, ULIP, NPS, Equity Funds, EPF, National Pension System, PPF, debt schemes, FDs, gold, real estate, senior citizens, Budget 2021, Tax efficiency,Avoid being overly aggressive after one point. If you have bigger risk-taking capabilities, there are investment options other than tax-savings to look into.

Remember the date 11th January 2021? R. Ashwin & Hanuma Vihari faced 258 deliveries and blocked whatever was thrown at them. They helped India draw the third Test match. What a performance it was. This lead, boosted by a newly gained confidence, to a solid win in the fourth Test match.

I’m talking about it because Tax saving investment is a lot like a cricket Test match. You plan ahead and play long innings. Whatever is being thrown at you- bouncers like Covid-19, spin-balls like retirements, or yorkers like economic downturns- if you keep playing, there is nothing that can stop you from being a winner.

Tax Planning is a crucial aspect of your financial plan. Section 80-C and 80-CCD of the Income Tax Act have remained the most preferred options because they are simple to understand.

Here are the 11 batsmen of the investment world that can help you save taxes and increase your wealth:

Equity Linked Saving Scheme: ELSS are the game-changers. They give better performance in short term and are result-oriented. ELSS funds are equity-oriented mutual funds with a lock-in period of 3 years which is the shortest amongst all tax saving schemes. For the purpose of tax deductions, you can invest up to Rs 1.5 lakhs.

Employees’ Provident Funds and Public Provident Funds: Batsmen number 2 and 3. EPF and PPF are All-rounders of a tax-saving portfolio. A great tax saving option as it qualifies for deductions up to Rs 1.5 Lakhs per annum under section 80C of the Income-tax act. Additionally, it guarantees decent returns of 7–9%. One of the safest investment options as they are managed by the government of India, EPF and PPF offers tax exemption on the principal amount, interest income and maturity income. The only drawback is that PPF has a tenure of 15 years, so it is not suitable for the short term.

Sukanya Samriddhi Scheme: If you have a girl child below 10 years, go for Sukanya Samriddhi Yojna. It is a government-backed scheme to encourage parents to invest in the girl child’s future. You can claim a deduction of up to Rs 1.5 Lakhs under section 80C of the Income Tax Act. Apart from the principal invested, even the interest income earned is exempt from tax. The only caveat is you cannot invest in this scheme for more than two girls.

National Pension Scheme: NPS is a government-sponsored pension plan, regulated by the Pension Funds Regulatory and Development Authority. In addition to the Rs 1.5 Lakhs deduction under 80-C, Individuals can claim additional Rs 50,000 tax deduction under section 80CCD (1B). NPS allows non-government sector individuals to save and plan for their own retirement.

Money is managed in three separate accounts having distinct asset profiles viz. Equity (E), Corporate bonds (C) and Government securities (G). Investors can choose to manage their portfolio actively (active choice) or passively (auto choice). NPS offers quite a few options and is beneficial for individuals with varying risk appetites.

Unit Linked Insurance Plan: ULIP gives investors both insurance and investment under a single integrated plan. Investment in ULIPs is eligible for tax benefit up to a maximum of Rs 1.5 lacs under Section 80C of the Income Tax Act. Maturity proceeds are also exempt from income tax. There is a caveat: the sum assured or the minimum death benefit must be at least 10 times the annual premium. If this condition is not met, the benefit under Section 80C is capped at 10 per cent of the sum assured while the maturity proceeds will not be exempt from income tax.

Life Insurance: You can claim a deduction for the premium paid for your life insurance policy. Premium paid for a life insurance policy can be claimed under the Rs 1.5 Lakh ceiling in section 80C. Same as ULIP, to avail of this benefit the insurance cover must be 10 times your premium amount.

National Savings Certificate: NSC is an attractive option for risk-averse investors. While there is no maximum limit for investment, the maximum deduction that can be claimed is Rs 1.5 Lakh under section 80C. NSC has a lock-in period of 5 years.

Fixed Deposit: A 5-year tax-saving fixed deposit is qualified for deduction up to Rs 1.5 Lakhs under section 80C. It is one of the most sought-after tax saving options for senior citizens and retirees. However, TDS is applicable to the interest earned.

Interest Income on savings account: Income on a savings account is exempt from tax up to Rs 10,000 for individuals below 60 years of age. For senior citizens, interest income up to Rs 50,000 is exempt from tax.

Senior Citizen Savings Scheme: SCSS is for the senior citizens (60 and above) of India, retirees who have opted for the Voluntary Retirement Scheme (VRS) or Superannuation in the age bracket 55-60 and retired defence personnel with a minimum age of 50 years. An individual can invest a maximum amount of Rs15 lakh or the amount received on retirement, whichever is lower, in an SCSS account. The scheme offers a regular stream of income with tax-saving benefits.

NPS, ULIP, NSC and Life Insurance are the middle order batting line up. They are steady players that help in the long run. They take chances only when the risks are manageable. A solid middle order is the backbone of any team.

FDs, SCSS and Interest on savings accounts are the tail-enders. They are crucial to bat till the last ball. A confident and determined tail-ender brings home the trophy.

There are some pointers to keep in mind, though. Avoid being overly aggressive after one point. If you have bigger risk-taking capabilities, there are investment options other than tax-savings to look into.

by Tushar Bopche, Product Head – AUM Business, YES SECURITIES

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