Reducing Your Taxes Through Investments
The Income Tax Act of India says that under section 80C, an individualcan reduce his taxable income by Rs.1 lakh by investing in certaininvestment instruments. Following instruments come under section 80C:
Themaximum combined investments through all these instruments is one lakhin a year. But, in a hurry to invest people fail to realize that thoughdeductions can be claimed by investing in such instruments, yet theyend up paying tax on the income earned through interest or would beliable for capital gains tax on redemption of these schemes. Lets, havea look at these instruments.
1. Equity Linked Savings Schemes (ELSS):These are very high risk instruments. But, as risks are high so is theexpected gains. This is also known as tax saving mutual funds. It has alock in period of three years. Returns are not guaranteed as the amountinvested is invested by a mutual fund in diversified stocks in thestock market. So, the return is purely dependent on the type of funds,track records and the performance of the stock market. One can savesome money by buying directly from the mutual fund as there is no entryload if applied directly, or else you may end up paying an entry loadof around two percent. It is one of the most important instrument as inthe long run the stock market will see a rise.
2. Public Provident Fund:The risk involved is low. One can invest from a minimum of Rs.500 to amaximum of Rs.70,000 in a year. Interest rate is 8 per cent per annumcompounded while the lock in period is 15 years. It should be notedthat the interest earned is tax free, so, the effective yield becomesmuch higher after adjusting for tax benefit. But, the problem with thisscheme is that one has to remember to invest at least an amount ofRs.500 every year for continuous 15 years or the account will becomedefunct. The other negative thing about this scheme is that theinterest rates are fixed by the government from time to time.
3. Life Insurance Policy:Life is full of uncertainties. So, one should have some backup plans.One can invest in an insurance either from a investment point of viewor take an insurance to cover your families in case of any wantedincident. From an investment point of view on can choose such policiesthat offers a guaranteed return on maturity. In other case, one can gofor term insurance where your families will get the sum assured in caseof death of the person insured. Premiums in insurance can vary frommonthly to quarterly or half yearly or even annually. Similarly, apolicy can have maturities from five years onwards. Premiums paid andproceeds received from an insurance policy is generally exempt from tax.
4. Fixed Deposits:These are low risk instruments. One should always note that only thosefixed deposits which have a maturity period of five years or more areexempt from tax. The interests vary from banks to banks. One can havefixed deposits either in a scheduled bank or any post office. But,income from such fixed deposits are taxable. So, if one takes tax intoconsideration then, the effective yield will be lower than the interestpaid.
5. National Savings Certificate:These are also low risk instruments. It comes in denominations ofRs.100, Rs.500, Rs.1000, Rs.5,000 and Rs,10,000. The forms areavailable at any post offices. The maturity period is six years whilethe interest rate is 8 per cent compounded half yearly. Here, toointerest is taxable.
6. Government Infrastructure Bonds:The problem with these tax saving bonds are that they are open andavailable only for a fixed period. The major institutions that offerthese bonds are ICICI, IDBI and Rural Electrification Corporation. Termperiods can range from five to seven years and interest may vary from 6to 9 percent per annum.
7. Pension Plans:These are highly risky instruments. Various insurance companies such asLIC, Tata AIG Life, Aviva, ICICI Prudential and Bharti Axa Life offersuch pension plans. On maturity, the investor receives one-third of theamount while the remaining 2/3rd goes into an annuity that providesregular income in the form of pension. Only premiums till Rs.10,000 peryear are eligible for deductions from total income. Like Unit LinkedInsurance Plans (ULIP’s), a substantial amount of the money investedinto Pension Plans goes into paying ‘fund charges’ and commissions.Moreover, the annuity received by the insured investor is taxable.Terms can extend from 10 years upwards. Though some return may beguaranteed but, a large part depends on the debt market, share marketand inflation. Hence, high risk.
8. Unit Linked Insurance Plan:These are also very risk instruments. This is by far the worst taxsaving instrument to invest your money in. A huge amount of commission,charges and entry load is deducted from the amount you have invested.The remainder is invested in a set of funds that invest in the debt andshare market in different proportions. In some cases, the commissionmay be around 50 per cent of the amount invested. Term period isusually five years and above, while returns are not guaranteed asdepends mostly upon market performance and how your plan performances.
9. Senior Citizens Saving Scheme:These schemes are for people over the age of 60 years and retiredpersonnel over 55 years. This scheme is available at all public sectorbanks in the country. Investments have to be made in multiples ofRs.1000 till a maximum of 15 lakhs for a period of five years. Thedeposit made gets an interest of 9 percent per year from the date ofdeposit which is computed quarterly. Interest is taxable and isdeducted at source.
Originally Posted at: www.singhsanjay.blogspot.com
- Provident fund
- National Savings Certificate (NSC)
- Tax Saving Mutual Funds
- Pension Plans
- Fixed Deposits
- Life Insurance policies
Themaximum combined investments through all these instruments is one lakhin a year. But, in a hurry to invest people fail to realize that thoughdeductions can be claimed by investing in such instruments, yet theyend up paying tax on the income earned through interest or would beliable for capital gains tax on redemption of these schemes. Lets, havea look at these instruments.
1. Equity Linked Savings Schemes (ELSS):These are very high risk instruments. But, as risks are high so is theexpected gains. This is also known as tax saving mutual funds. It has alock in period of three years. Returns are not guaranteed as the amountinvested is invested by a mutual fund in diversified stocks in thestock market. So, the return is purely dependent on the type of funds,track records and the performance of the stock market. One can savesome money by buying directly from the mutual fund as there is no entryload if applied directly, or else you may end up paying an entry loadof around two percent. It is one of the most important instrument as inthe long run the stock market will see a rise.
2. Public Provident Fund:The risk involved is low. One can invest from a minimum of Rs.500 to amaximum of Rs.70,000 in a year. Interest rate is 8 per cent per annumcompounded while the lock in period is 15 years. It should be notedthat the interest earned is tax free, so, the effective yield becomesmuch higher after adjusting for tax benefit. But, the problem with thisscheme is that one has to remember to invest at least an amount ofRs.500 every year for continuous 15 years or the account will becomedefunct. The other negative thing about this scheme is that theinterest rates are fixed by the government from time to time.
3. Life Insurance Policy:Life is full of uncertainties. So, one should have some backup plans.One can invest in an insurance either from a investment point of viewor take an insurance to cover your families in case of any wantedincident. From an investment point of view on can choose such policiesthat offers a guaranteed return on maturity. In other case, one can gofor term insurance where your families will get the sum assured in caseof death of the person insured. Premiums in insurance can vary frommonthly to quarterly or half yearly or even annually. Similarly, apolicy can have maturities from five years onwards. Premiums paid andproceeds received from an insurance policy is generally exempt from tax.
4. Fixed Deposits:These are low risk instruments. One should always note that only thosefixed deposits which have a maturity period of five years or more areexempt from tax. The interests vary from banks to banks. One can havefixed deposits either in a scheduled bank or any post office. But,income from such fixed deposits are taxable. So, if one takes tax intoconsideration then, the effective yield will be lower than the interestpaid.
5. National Savings Certificate:These are also low risk instruments. It comes in denominations ofRs.100, Rs.500, Rs.1000, Rs.5,000 and Rs,10,000. The forms areavailable at any post offices. The maturity period is six years whilethe interest rate is 8 per cent compounded half yearly. Here, toointerest is taxable.
6. Government Infrastructure Bonds:The problem with these tax saving bonds are that they are open andavailable only for a fixed period. The major institutions that offerthese bonds are ICICI, IDBI and Rural Electrification Corporation. Termperiods can range from five to seven years and interest may vary from 6to 9 percent per annum.
7. Pension Plans:These are highly risky instruments. Various insurance companies such asLIC, Tata AIG Life, Aviva, ICICI Prudential and Bharti Axa Life offersuch pension plans. On maturity, the investor receives one-third of theamount while the remaining 2/3rd goes into an annuity that providesregular income in the form of pension. Only premiums till Rs.10,000 peryear are eligible for deductions from total income. Like Unit LinkedInsurance Plans (ULIP’s), a substantial amount of the money investedinto Pension Plans goes into paying ‘fund charges’ and commissions.Moreover, the annuity received by the insured investor is taxable.Terms can extend from 10 years upwards. Though some return may beguaranteed but, a large part depends on the debt market, share marketand inflation. Hence, high risk.
8. Unit Linked Insurance Plan:These are also very risk instruments. This is by far the worst taxsaving instrument to invest your money in. A huge amount of commission,charges and entry load is deducted from the amount you have invested.The remainder is invested in a set of funds that invest in the debt andshare market in different proportions. In some cases, the commissionmay be around 50 per cent of the amount invested. Term period isusually five years and above, while returns are not guaranteed asdepends mostly upon market performance and how your plan performances.
9. Senior Citizens Saving Scheme:These schemes are for people over the age of 60 years and retiredpersonnel over 55 years. This scheme is available at all public sectorbanks in the country. Investments have to be made in multiples ofRs.1000 till a maximum of 15 lakhs for a period of five years. Thedeposit made gets an interest of 9 percent per year from the date ofdeposit which is computed quarterly. Interest is taxable and isdeducted at source.
Originally Posted at: www.singhsanjay.blogspot.com
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