Investment options for tax saving in india

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Download ET MARKETS APP. Drag according to your convenience. Choose the tax-saving instrument that best suits your needs and financial goals.

So many options, so little time. ET Wealth Ratings The ET Wealth's annual ranking of tax saving instruments assesses all the investment options on eight key parameters— returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income.

Each parameter is given equal weightage and composite scores are worked out for the various tax-saving options. Fixed deposits score very high on this front.

Just a few clicks and your investment is done. Insurance agents also make the process very easy. They volunteer to do all the paperwork and the investor has to just sign on the dotted line. But the cost of this ease is very high. And traditional life insurance plans not only offer niggardly returns, but force the buyer to continue till maturity.

Investors who are ready to make a little effort will find it very rewarding. Investing in ELSS funds has now become very easy with the launch of the e-KYC facility. The whole process does not take more than minutes.

The Pension Fund Regulatory and Development Authority has made NPS investing completely paperless. Ulips can also be bought online with ease. A word of advice. Some investment options may not be suitable for certain individuals.

For instance, even though ELSS funds can offer terrific returns, senior citizens above 70 should steer clear of these schemes. Some of the investment options on our list may not even be available to all investors. Even so, these are good tax-saving options for those who are eligible. ELSS FUNDS The great returns they have generated in the past and their enormous potential have placed ELSS funds at the top of the list for the third consecutive year.

The category has generated The returns from individual funds vary because each fund has a different portfolio. Investors can expect stable returns without any fireworks. An investment of Rs 50, made in the direct plan of the fund in January would have almost doubled to Rs 97, in three years. Four of the five schemes in our list of top ELSS funds are large-cap oriented funds. Only Birla Sun Life Tax Relief 96 has a mid-cap orientation.

The high returns are not the only plus point.

The best ELSS funds Use them to build wealth as well as save tax under Section 80C Returns are annualised. Data as on 4 Jan Value Research ELSS funds also score high on costs, transparency, taxability and liquidity. There is no entry load and the investor is charged barely 2.

Mutual funds are very well regulated by Sebi and everything—charges, portfolios and transactions—are in the public domain. Returns are tax free because long-term capital gains from equity funds are exempt.

As for liquidity, these funds have the shortest lock-in period of three years. However, this lock-in period should not be construed as the holding period for the fund. Many investors make the mistake of exiting after three years. This is why the ELSS category continues to see low net inflows from investors. Some experts say ELSS funds are the best way to start investing in equities.

The lock-in period enforces a discipline that eventually becomes a habit for the investor. Chandrasekharan Hariharan 30, Pune He does not have exposure to stocks and wants to start investing in equities through mutual funds.

For him, ELSS funds will be the ideal choice. Investors such as Pune-based Chandrasekharan Hariharan will find ELSS the ideal stepping stone into equity investments. As we have often said, SIPs are the best way to invest in equity funds.

This way you are able to diversify across time. However, given that we are already in the last quarter, you may not be able to invest in ELSS through SIPs now. Still, split your investment into three tranches and invest before 31 March.

Smart tip It takes just minutes to invest online. Many fund houses even do the KYC online. HOW NOT TO INVEST IN ELSS Avoid these mistakes that investors make Investing a lump sum at the end of the year SIPs are by far the best way to invest in stocks and equity funds.

Though SIPs in equity funds have seen a robust increase, the simple logic is lost on ELSS investors.

Investment Plans - Compare Best Investment Plans in India

Instead of taking the safer and more convenient SIP route, taxpayers get caught up in the year-end rush and invest a lump sum in risky assets. Basing your choice on short-term performance The other big mistake is to look at the short term performance of the funds and go with the best performer. ELSS funds are equity schemes, and the stability of the returns is more important than the quantum of gain. Look at the 3-year and 5-year performance of the scheme before you make a choice.

We have identified the best ELSS schemes based on the Value Research star ratings, which take into account several parameters, including the stability of returns and long-term risk-adjusted performance. Choosing the wrong option Dividends from mutual funds are just another way of booking profits.

The dividend reinvestment option is even worse. Every time the fund gives out a dividend and reinvests the money into your account, the three-year lock in period starts all over again. In effect, you are locked in for perpetuity. Ignoring smaller funds With an annualised return of But very few investors have gained from it, because its AUM is only Rs crore.

The terrific returns generated by this tiny fund has led us to include this scheme in our list of top ELSS funds. There is a difference between lock-in and maturity. NSCs and tax-saving fixed deposits mature in five years and therefore the money comes back to you after five years.

Look at ELSS funds as regular equity funds that should be held for the long term.

Till last year, the taxability of the NPS was a big issue. NPS is especially useful for investors who may have exhausted the Rs 1. How NPS funds have done A balanced mix of all three funds would have generated good returns for investors Returns are average of all pension fund managers; 3- and 5-year returns are annualised. Value Research Bangalore-based DINK couple Gauri and Sameer Bharwada are aggressive savers and invest in mutual funds.

They can cut their tax further if they put Rs 50, each in NPS. Gauri 30, and Sameer Bharwada, 30, Bengaluru They invest in a mix of PPF and ELSS funds and have exhausted their Section 80C limit.

If they want to further reduce their tax, they can invest in the NPS under Section 80CCD 1B. Another way the NPS can cut tax is by rejigging the salary. Click here to see how much tax this can save. However, the take-home pay of the employee will come down. Smart tip For a higher allocation to stocks, go for the aggressive lifecycle fund. Equity exposure will progressively reduce as you age.

ULIPs Many readers may not agree and even experts might have their reservations about them, but the new online Ulips are very different from the pre policies. The new Ulips have very low costs, which leaves a lot on the table for the buyer.

ULIPs offer tax-free returns Funds have performed well but the charges reduce the returns for investors Returns are annualised. Morningstar However, keep in mind that these numbers only indicate the rise in the NAV. Some Ulip charges are levied by cancelling units, so the actual returns for the investor are likely to be lower. Even so, the ease of online access has made these plans attractive and use friendly.

So, if you switch your corpus from debt to equity and then back to debt, the gains will not be taxed. You can also park short-term money in the liquid fund of your Ulip using the top-up facility. Despite these advantages, Ulips continue to be in the doghouse. It is time for investors to assess these plans afresh, without being influenced by the chequered history of the category.

Smart tip Use the Ulip as an asset allocation tool to rebalance your portfolio without incurring a tax liability. VPF AND PPF The Provident Fund PF is the bulwark of the retirement savings of the average salaried employee. But it can also be a great way to save tax. Contributions to the VPF are eligible for the same tax benefits as the PF. The best thing is that the money automatically flows into the PF account every month. The interest rate on the PF has been cut by 15 basis points to 8.

Even so, it remains well above the average consumer inflation rate 5. For investors not covered by the PF, the Public Provident Fund PPF can be a suitable alternative.

PSU bank employee Harshinder Kaur is covered by the NPS. Harshinder Kaur 27, Sriganganagar She gets tax deduction for the mandatory contribution of Rs 24, to the NPS. Although she wants to consider other options, the balance is put in the PPF. She uses the PPF for the remaining portion of her tax-saving investment limit under Sec 80C. However, investors should be ready for rate cuts in the future. But analysts feel the government did not cut rates because it would have fuelled the simmering resentment against the demonetisation.

Even if the PPF rate is cut, it will give higher returns than bank deposits and corporate FDs. Banks have cut deposit rates to Smart tip Utilise the tax-free VPF to build up the debt portion of your portfolio.

SUKANYA SAMRIDDHI SCHEME If you have a daughter below 10, the Sukanya Samriddhi Yojana SSY is a better alternative to the PPF. The SSY offers a higher interest rate of 8. But there are certain drawbacks, such as restrictions on withdrawals and a longer lock-in period. Like the PPF, the interest rate of the scheme might be cut in the future as interest rates come down. The government bond yield to which the scheme is linked is now hovering around 6.

Analysts believe the rates will eventually have to be aligned with the bond yields as per the formula suggested by the Gopinath panel.

Accounts can be opened at any post office or designated branches of PSU banks and select private banks with a minimum investment of Rs 1, Every year, you must invest at least Rs 1, in the account.

There is also an investment limit of Rs 1. You can open accounts for up to two girls, but the combined limit cannot exceed Rs 1.

Tax Planning: How to Save Tax legally in 8 different ways

Smart tip Open an account in a bank with good online facilities. This will make it easier to conduct transactions. The payment dates are the same for all investors, irrespective of when they joined.

It is a five-year scheme, and can be extended for a period of three years once it matures. The account can be opened in any post office branch, designated branches of PSU banks and select private banks. However, there is an investment limit of Rs 15 lakh per individual.

Many retirees get around this restriction by gifting money to their spouses for investing in the scheme. Investors who have already hit that limit should look at other tax-saving options such as PPF and NSCs. Rai Grover 74, Delhi Being a senior citizen, he is not in a position to take risks. If closed before two years, the investor has to pay 1.

Smart tip If you hit the Rs 15 lakh ceiling, opt for senior citizen tax-saving fixed deposits that offer about 8. NSCs After spending several years in the doghouse, this popular tax-saving instrument is back in the limelight. While banks have cut interest rates on tax saving FDs, small savings schemes including NSCs have been spared. Also, unlike PPF and SSY, the interest rate of the NSC does not change if rates are cut.

Smart tip Instead of tax-saving fixed deposits, use NSCs to save tax and earn a higher returns at lower risk. BANK FDs This is probably the easiest way to save tax if you have a Netbanking account.

After the demonetisation and the digital push, almost everyone has one. A few clicks of the mouse and your tax planning is done. However, as mentioned earlier, this convenience comes at a very high cost. Interest rates have come down significantly and are close to The best tax saving FDs Rates have been reduced after demonetisation. The post-tax yield is even lower. The bigger problem is that the interest is fully taxable. It is added to the income of the investor and taxed at the marginal rate applicable to him.

Though NSCs offer higher rates than most banks, many senior citizens prefer to invest in deposits of their own banks, because they get better service than in a post office.

Familiarity with bank staff is another important factor. These deposits are also useful when time is running out and the taxpayer is unable to decide where to invest, since they can be opened very quickly. However, keep in mind that the interest from such deposits will be subject to TDS if the total income exceeds Rs 10, in a financial year.

Many investors have the misconception that if TDS has been paid, they have no further tax liability. Taxpayers will also have to report the income in their tax returns as income from other sources. Ignore reporting the income at your own peril. When TDS is cut, it gets reflected in the Form 26AS of the individual. The information in the Form 26AS is matched with the returns filed by the taxpayer. If tax has been cut, but that income is not declared by the taxpayer, he will surely get a notice for the discrepancy.

Smart tip Opt for the annual interest payment option so that your money does not get locked for the full five years. PENSION PLAN Pension plans from insurance companies are not a great way to save tax because of the high charges. Although Ulip charges have been reduced, pension plans still levy high charges on buyers.

In comparison, the low-cost NPS is a much better alternative. The pension plans from insurance companies are also not as tax friendly. Smart tip Opt for higher equity exposure in your pension plan when you are young, to gain from stocks.

INSURANCE Every year, millions of Indians buy life insurance policies to save tax. These policies neither give good returns, nor offer adequate cover to the policyholder.

They eventually become millstones around the necks of the buyers, preventing them from investing for other financial goals. Pune-based Vinayak Srigadi pays Rs 97, for three endowment policies. But Srigadi knows that he will suffer a bigger loss if he continues to pour money into these low-yield policies.

Vinayak Srigadi 32, Pune His three insurance policies take a premium of Rs 97, per year and offer him a low cover of Rs He intends to close them this year. Not many insurance buyers understand this. The tax deduction is the paramount concern. Experts say insurance policies are the worst instrument among all tax-saving options. This will not even beat inflation.

The only insurance policy worth buying is a pure protection term plan. These plans only cover the risk of death and do not have a maturity value. As a result, these plans have very low premiums. A year old non-smoker can buy a life cover of Rs 1 crore for as little as Rs 7, a year. Srigadi plans to buy a term plan this year after he closes the three endowment insurance policies. Buy low-cost pure protection term plans for life cover.

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