2017 has just started and it is only a matter of time before people start balancing their investment portfolio. Before it gets too hectic, you are advised to start the procedure and check your tax liability. But before you do that, here are the top six options that can help you save tax for the FY 2016-17. These options are deemed best because they have been assessed on seven major parameters which are safety, returns, costs, transparency, flexibility, liquidity and tax saving ability with equal weightage. You can consider any of these as per your requirement:
Equity-Linked Savings Schemes (ELSS)
ELSS funds have continued to top the list for the second consecutive year now. Showing tremendous potential along with maximum transparency and high liquidity in comparison to other options, ELSS funds have given an average return of 17.8% in the last three years. If anyone opts for the dividend option in such funds, they can even get some of their investment back. This is more than what anyone can ask for.
There is also an option to invest in an ELSS fund online, provided one should have met their KYC requirements. The fund houses also facilitate a new investor by picking the documents from their house and guiding them through screening of KYC. ELSS funds carry the market risks as any other diversified fund but are good for the long-term. One expert advice would be to opt for a direct plan as the returns are higher.
New Pension Scheme (NPS)
NPS was made even more advantageous as a tax saving option last year when the budget was declared. Such investments offer an additional tax deduction of INR 50,000. Pension fund managers have further been given the freedom to invest largely in stocks. They need not make a passive investment by duplicating the index.
NPS as a tax-saving tool has a limitation in form of the equity exposure cap. For someone who is young and is willing to invest in NPS, the 50% cap is way too conservative allocation. What further adds to the woes is taxability when NPS matures. It is a mandate that 40% of the total corpus has to be put in annuity. Currently the money earned from an annuity has normal tax rate and the government is considering its exemption.
One expert advice would be to make active investment in stocks as it will offer better returns. Also, choose the auto option as the equity exposure is linked to one's age and comes down as they grow older.
Unit Linked Insurance Plan (ULIP)
ULIPs stand at third place in the list of tax saving options because they are highly affordable, flexible and some of them cost even lesser than the direct mutual funds. One advantage of opting for ULIPs over ELSSs is that one can easily switch the corpus from debt to equity and vice versa. Additionally, there is no tax implication on the gains that are reaped after the switch is made as these are exempt under Section 10 (10d). One expert advice would be that only those who know how to utilize the switching option should try ULIP. Another one would be to opt for debt or liquid fund of ULIPs and gradually shift the investment to equity.
Public Provident Fund (PPF) and Voluntary Provident Fund (VPF)
Good old PPF and VPF have slipped down to the fourth position from the last year but they continue to be ultra-safe. This makes them a good option for those who don't mind less earning and are looking for assured returns.
Four years have passed since PPF was first linked to bond yields. But since the yields have not changed, the PPF rate has still not seen a fall. However, the government has shown some signs of reviewing the interest rates.
If this is becoming a matter of worry for you, you can opt for the VPF which offers the same tax saving benefits and interest rate as EPF. The chances of the interest rate falling in the near future are very slim for VPF in comparison to EPF. Another lucrative benefit is that there is a cap on investment in VPF. Besides, the necessary contribution gets deducted every month from the salary so it does not feel like an added responsibility. The expert advice to those going for this option would be to allocate 25% of the salary, whenever one receives a hike, to their VPF account.
SENIOR CITIZENS' SAVING SCHEME
It is the highest ranked option amongst all the Post Office schemes in terms of interest with the rate being 9.3%. The scheme's tenure is of five years and is further extendable by three years. The interest amount is paid quarterly on a particular date, regardless when the investment has been made. The investment in this scheme is limited to a sum of INR 15 lakh per individual and is open to people who are above the age of 60. In a special case where an investor has opted for voluntary retirement and is still not employed, the minimum age is 58. There's no age bar for a defense personnel and they are allowed to invest even before the age of 60, if they meet other criterion. If someone would want to invest more than the limit, they can gift the remaining amount to their spouse and make an investment in their name.
SUKANYA SAMRIDDHI SCHEME
The 'Sukanya Samriddhi Scheme' is the latest tax saving option. Since it is open for girls who are below the age of 10, making its advantage limited, the scheme is ranked quite low in the table. If one has a daughter of the mentioned age, they can reap the benefits that the scheme has to offer. It is still a better investment option than child plans, bank deposits and the PPF account that has been opened for a girl child's education and marriage.
Accounts under the scheme can be opened in any designated branch of a PSU bank or a post office with minimum investment being INR 1,000 and maximum in a financial year being INR 1.5 lakh. Deposits in this account can be made for a period of 14 years after it is operational. A parent can get their account opened for a maximum of 'two' daughters. However, the combined investment in both the account cannot exceed the maximum limit in a financial year. Such an account matures when the girl reaches 21. The parent is free to withdraw 50% of the amount in the account when the girl turns 18 or gets wedded.
The vintage ones like bank fixed deposits, NSCs, pension plans and insurance policies follow these top six.
Planning the tax beforehand allows you to choose a tax saving instrument that is most favorable. For e.g., for a retired taxpayer, Senior Citizens' Saving Scheme makes much more sense than ELSS even though the former is mentioned somewhere down the list. So find the one that suits you the best and get going. Happy investing and saving!
Naval - Goel is Founder & CEO PolicyX.com