Six best tax-saving instruments to invest in

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Published: Thursday, June 23, 2011, 16:22 [IST]
 
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Six best tax-saving instruments to invest in

Let"s have a look at some of the best tax saving options available in market currently:

Public Provident Fund (PPF)
Public Provident Fund or PPF under section 80C of the Income Tax Act is one of the best options available for tax-saving purpose. It is specially designed for the risk averse individuals who aim to save capital. It is suitable for the individual who has long-term horizon goal because lock-in period for such scheme is 15 years. So, the individuals with short-term horizon should not invest in this instrument as it locks liquidity for longer period.

Currently, PPF is offering a return of 8 percent, which is compounded annually. You can invest minimum of Rs 500 to maximum of Rs 70,000 in a year.

Employee"s Provident Fund
It is compulsory for the salaried class to contribute 12% of the sum of basic pay and dearness allowance to Employee"s Provident Fund (EPF). This is like forced-saving towards retirement planning and have a contribution from both the employee and employer. A deduction of up to Rs 1,00,000 is allowed under section 80C.

Currently, EPF provides return of 8.5 percent and its one of the best tax-saving investments because the interest earned is tax free. This is also risk free because its guaranteed by Government of India and there is no risk of default.

Life Insurance
You can also save maximum of Rs 1,00,000 by buying or renewing life insurance policy for self, spouse or any dependent children to qualify for deduction under section 80C. The proceeds from a life insurance policy on maturity are exempt under section 10 (10D), provided that the premium paid in any year should not exceed 20 percent of the sum assured.

Equity-linked Savings Scheme
Equity-linked savings schemes (ELSS) are mutual fund schemes that are eligible for deduction under section 80C. If you come under the zone of high risk-high return profile, this is the perfect option to go for. You can invest minimum of Rs 500 to maximum of Rs 1,00,000 in these schemes and they usually carry a lock-in period of 3 years. These are market-linked schemes so the returns entirely depend on the performance of the markets.

National Savings Certificate ( NSC)
National Savings Certificates (NSC) is the other investment options that provide you tax deduction under section 80C and are guaranteed by the Government of India so they are not exposed to any kind of risk. They are available at local post office and provide you with the return of 8 percent. The interest accrued every year need to be reinvested and thus eligible for deduction.

You can invest minimum of Rs 100 with lock-in period of 6 years. Unlike PPF, NSCs have no upper limit on the maximum amount that can be invested in a year.

Infrastructure Bonds
This year government has come up with one more investment avenue to save tax – Infrastructure Bonds. You can invest maximum of Rs 20,000 in infrastructure bonds to get a tax rebate under section 80CCF. The infrastructure bonds issued by both public sector or state owned companies as well as private sector companies would qualify for investment under this section.

The money raised through these bonds would be primarily invested in infrastructure projects – building of roads, ports, airports, power plants, etc. These investments are suitable for the individuals with the long-term horizon because these bonds will come with long-term tenures of more than 10 years. Returns of public sector bonds will vary from 7-7.5 percent and that of private sector bonds will vary from 8–8.5 percent.

Changes in tax regime
The Government of India is going to change the tax regime from April 2012 i.e. the tax benefits of any equity linked tax saving schemes will be phased out starting from April 1, 2012. So, this might be your last opportunity to save tax through mutual funds. The new tax regime will not have ULIP, ELSS, FD, NSC, Insurance plan with return component, and post office savings under tax saving instruments. The tax saving schemes under direct tax regime will only limit to provident fund, new pension scheme, pure term insurance plan, and other Government scheme as per directed. This is proposed plan, there may be changes at the time of implementation.

OneIndia Money

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