There are many investments that offer tax free income in India. It is very important to look at some of these to save tax. Here are 4 tax saving investments that offer tax free income.
1) Public Provident Fund
The interest earned on the Public Provident Fund or PPF as it is called is completely free from tax. Apart from this the PPF also qualifies for tax benefits under Sec80C of the Income Tax Act. This is a very popular investment scheme because of these two tax benefits that they offer. Apart from this the interest on the PPF are much better than almost all large nationalized banks in the country. The PPF currently offers an interest rate of 7.10 per cent per annum.
The one drawback of the PPF is that it has a lock-in period, however, that helps an individual to build a corpus at a later stage.
2) Tax Free Bonds
A few years ago there were many government owned institutions who were allowed to raise money through tax free bonds. Some of these were HUDCO, REC, PFC, Indian Railways Finance Corporation etc.
The interest earned from these bonds is completely tax free in India. However, investors may ask a pertinent question on where to buy these bonds from? Presently, they are listed on the stock exchanges. For example, the 8.65% IRFC Tax Free Bond offers an interest rate of 8.65%, however, you need to buy the same at a price of Rs 1,290, which means the yields drop.
Another thing is that the liquidity of these bonds is not to great.
Unit Linked Insurance Plans are another set of investments, where the income earned is tax free in the hands of investors. They do also provide insurance at 10 times the premium paid. However, the returns are not too great, as a lot of money is allocated to administrative, mortality charges etc. Investors have a choice of placing their money in equity schemes or debt schemes.
There is a lock-in period of 5 years and in some cases it could be more and that varies depending on the mutual fund. Over the years, these schemes have achieved reasonable popularity.
4) Interest on savings bank account to the tune of Rs 10,000
The interest on savings bank account does not attract income tax if the interest earned during the course of the year is Rs 10,000 across all savings bank accounts of an individual. So investors can plan accordingly. One of the problems with this investment is that the interest rates are very low. One needs to place the money in either small finance banks or banks like Indusind Bank, where the interest rates on the savings account is 6% for balances above Rs 10 lakhs.
About the author: Sunil Fernandes has spent 26 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, mutual funds and tax planning.