Every year you look for ways to save on taxes by making various investments that are tax free. However, you need to also consider the tax implications on your investment after its maturity. If you have already made very less from the money you stored away, you surely do not wish to lose more by way of tax payments.
Post office schemes like the National Savings Certificate (NSC), Senior Citizens' Savings Scheme (SCSS), or any 5-year time deposits with banks and post offices, the maturity amount is completely taxable. Additionally, these saving instruments will fetch you below market returns, while saving on tax marginally.
Here are 4 tax-free returns on investment options:
Voluntary Provident Fund (EPF)
You may already know that 12 percent of the basic pay of a salaried individual goes into the Employees Provident Fund (EPF) and deposits made towards this savings instrument for retirement are tax-free up to a limit of Rs 1.5 lakh under section 80C.
But, additionally, you can voluntary contribute up to 100 percent of the basic and DA of your salary towards it. The interest earned on the EPF is tax-exempt as long as they employed for five continuous years or more.
To apply or discontinue from VPF one should contact their employer. Note that this will act like savings towards your retirement and will be locked in till the end of your employment years, so invest accordingly.
Equity-Linked Savings Scheme (ELSS)
ELSS are diversified mutual funds with:
- tax-exempt benefits on deposits up to the slab limit of Rs 1.5 lakh per year
- Lock-in period of 3 years, which makes it an LTCG (long-term capital gain).
It is important to note that from the current financial year, any LTCG made on a mutual fund with 65 percent or more will taxed at 10 percent. However, the bright side is that it is exempt up to a limit of Rs 1 lakh per annum. So if you invest accordingly, you can make use of the tax exemption benefit.
Additionally, these schemes are subject to dividend distribution tax of 10 percent, so it is advisable to choose a growth option over dividend to gain tax-effective returns for a long-term period.
Public Provident Fund (PPF)
PPF schemes have been attractive for its EEE (exempt-exempt-exempt) tax status, which means that its investments are tax-free, interest earned is tax-free and the maturity amount is also exempt from tax. Apart from that, other benefits include:
- it is has a sovereign guarantee of a promised fixed return rate
- can be opened in the name of a minor (you need to be their legal guardian)
- Minimum requirement of contribution is only Rs 500 per year to keep the account active.
- Can be extended by a period of 5-years after the 15-year scheme matures, with continued extended tax benefits.
- Minimal risk exposure unlike ELSS.
Sukanya Samriddhi Yojana
This small deposit savings scheme was launched to support the "Beti Bachao Beti Padhao" mission. It is currently the highest tax-free risk-free investment option in India with 8.1 percent per annum interest rate. The scheme has an EEE tax status.
The account needs to be opened in the name of a girl child between the time of her birth until she turns 10 years old. The minimum deposit per year to keep the account active is Rs 250. The account will remain operative for 21 years from the date of opening or until the marriage of the girl (over 18 years of age).