Tax saving schemes

[Sanjay]

#19446

Hi,

Would like to know the best tax saving options, plans and schemes for 2016 that can help to maximize tax benefits.
It would be great, if someone can give me a fair idea on this.

Regards,
Sanjay

[Amal]

#20231

Hi Sanjay,

Greetings!

I appreciate your taking the time to write to us.

Here is a list of some of the best tax saving options, plans and schemes for 2016 that can help individuals maximize tax benefits:

1. Opt for higher contribution to Provident Fund account

The Contributory Provident Fund is a great way to build a tax-free corpus for your retirement. Intimate the accounts division of your office to deduct a higher contribution from your salary towards the CPF. General Provident Fund allows an employee who opts for a higher contribution to change the mandate twice in a year. Also, a portion of the corpus can be withdrawn for specific purposes and emergencies.

2. RECURRING DEPOSIT (RD)

Interest rate does not change till deposit matures

If you are looking to save for a shortterm goal, go for recurring deposits. It is a safe option that inculcates the saving habit. Banks offer recurring deposits of up to 10 years, but one should choose a tenure that matches one's requirements.The big advantage is that once you start a recurring deposit, the interest rate does not change. So, even though rates may fall, you continue to enjoy the contracted rate till the deposit matures.

3. NEW PENSION SYSTEM (NPS)

Avail of additional tax benefit on NPS investments

The additional money coming your way can help you save tax. Invest up to `50,000 in the NPS to get additional tax deduction under the new Sec 80 CCD(1b) This is over and above the tax deduction under Section 80C. The tax benefit means a person in highest 30% tax bracket effectively invests only `34,550 (he immediately gets a tax benefit of `15,450). You can invest in a mix of equity funds, corporate bond funds and government bond funds. There is also a lifecycle fund that invests as per your age.

4. LIFE INSURANCE COVER (LI)

Low-cost term plan safeguards the future of your dependents

Life can be unpredictable. Adequate life insurance cover helps mitigate the financial stress on a family if the breadwinner passes away. Ideally, the insurance cover should be 6-7 times your annual income. While traditional life insurance policies have very high premiums, a lowcost term plan can give high cover without straining your wallet.

5. MUTUAL FUNDS (MF)

Take exposure to stocks with tax-saving ELSS funds

Equities play a critical role in an investment portfolio. Even the most conservative portfolio should have some exposure to stocks to be able to beat inflation. You can invest in stocks through mutual funds. The ELSS category is a best option for new investors. These schemes are eligible for tax deduction under Section 80C. The returns are tax-free because long-term capital gains from equity funds are exempt from tax.

6. MONTHLY INCOME PLANS

If wary of stocks, go for low-risk mutual funds

If the thought of investing in stocks unnerves you, go for low-risk monthly income plans (MIPs) or debt funds. MIPs have only a small portion (15-20%) of their corpus invested in stocks. The rest is in bonds and deposits. Debt funds are even less risky. They don't have any exposure to stocks. Debt funds are a better option than fixed and recurring deposits because the income is taxed only at the time of withdrawal and that too at a lower rate. However, the returns of these funds are also lower.

7. ATAL PENSION YOJANA

Secure your future with this new pension scheme

A typical retirement plan is a mix of several options. The Atal Pension Yojana is a good addition to make in your retirement planning. It is open to people under 40 and offers pension for life. To get a monthly pension of `5,000, one needs to invest in the scheme till the age of 60.The pension will start after retirement and continue for life. On death, `8.5 lakh would be given to the legal heirs of the investor.

8. SUKANYA SAMRIDDHI YOJANA

Save for daughter's education and get tax benefits

The Sukanya Samriddhi Yojana is another good scheme to invest in. However, it is only for girls below the age of 10 and there is an annual investment limit of `1.5 lakh. Contributions are eligible for Section 80C benefit and the corpus is taxfree. Though the returns are assured, the interest rate could go down in future because it is linked to the government bond yields. Even so, it will be higher than what the PPF offers.

I hope that the above answers your questions satisfactorily

Regards,
Amal.S

[Sanjay]

#20232

Hi Amal,

Many thanks for your reply mail, yes this really did answer all my questions, but one more help I would require from your side is that, could you please clarify how Ulips differ from ELSS.

Regards,
Sanjay

[Amal]

#20233

Dear Sanjay,

Greetings!

The two are often confused because both are tax-saving instruments

Ulip vs ELSS

Ulip is an insurance-cum-investment product sold by insurers. Investors have the option to invest in equity, debt, hybrid and money market funds. The minimum sum assured is 10 times the annual premium (seven if age of entry is above 45). ELSS, or equity-linked saving schemes, are diversified equity funds that invest in stocks. These are pure investment instruments and don't offer any insurance. The confusion between the two is probably because both make investments in equity markets and are tax-saving instruments.

Charges & transparency

ELSS funds have only one charge, which is the fund management fee or expense ratio. This is around 3% and the cost is adjusted in the NAV , not charged separately. This means that you know exactly how much amount was invested and can calculate your return.

In Ulips, 60% of charges are incurred in the first few years, including the premium allocation charge; mortality charge; fund management fee; policy administration charge; fund switching charge and service tax deduction. The remaining money is invested in the market. As the charges start reducing only after 3-4 years, the investment and returns will be very low. For good returns, you need to stay invested for 10-15 years.Transparency is low since you do not know the exact amount being invested.Some charges are levied by reducing the units, not deducting from NAV .

Tax treatment

Both instruments are eligible for deduction of up to Rs 1.5 lakh under Sec 80C.ELSS follows the EEE mode–investment, capital gains and maturity amount are tax-free.

As for Ulips, if you surrender before the lock-in period, any deduction claimed earlier is reversed and you have to pay tax. The maturity amount is taxfree only on death of policyholder. If premium is more than 10% of sum assured, maturity proceeds are added to insured's income and taxed. If the premium is more than 10% of sum assured and the proceeds for a year exceed Rs 1 lakh, tax of 2% is deducted at source.

Lock-in period

Ulips have a lock-in period of five years, whereas in ELSS, your investment remains locked for three years. While you cannot quit Ulip, you can discontinue the premium, wherein a discontinuance charge is levied and the balance is moved to a discontinuation fund. In ELSS funds, no exit load is applicable.However, it is not advisable to quit a Ulip or an ELSS fund even after the lock-in period because equity investment gives the best returns in 7-10 years. In case of Ulips, this period is ideally 10-15 years.

Switching option

Ulips offer a switch option, which means that you can alter the ratio of invested amount in different funds. This allows you to shift funds as per the risk exposure at different life stages. In the case of ELSS, there is no such option and you can't touch the investment before the lock-in period.

Regards,
Amal.S

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