The time will soon come for filing your income tax returns (ITR form) for 2012 in India. The first three quarters of any year are the most dangerous ones for an investor’s financial planning. I say dangerous because he falls prey to people who sell products in the name of tax planning. This is the time when most investors end up with crap life insurance policies. This is also the month when life insurance policies sales pitch go on a screaming overdrive to sell, sell and sell. So how does one take the noise out of everything and adopt smart ways to save income tax in India ? We list for you some of the avenues available to you today to park your money in.
Remember to invest in the below products much before filing your income tax returns (ITR forms). Also keep in mind that Direct Tax Code (DTC) might or might not be implemented but don’t fret about it yet – just invest !
Smart Ways to Save Income Tax in India –
Public Provident Fund (PPF)
Your investment in Public Provident Fund contributes to the Section 80C limit of Rs 1 lakh. From this year, the investment in PPF has been jacked up from Rs 70,000 to Rs 1 lakh. With the kind of guarantee this investment product brings with itself and a 8.6% return that it will now generate, I cannot think of any reason why we would neglect it especially when the income is tax free !
Remember that you need to invest a minimum of Rs 500 each year in the PPF and that it locks your money for 15 years. In the fixed income instruments, it’s a shame if one were not to invest in this.
Employee Provident Fund (EPF)
For salaried employees, the EPF is deducted compulsorily from the monthly salary and the employees contribution is eligible for tax deduction under Section 80C. Again, the income is tax free and returns are around 8.5% a year.
While the forced saving acts as a great tool for saving money for investors who are not disciplined, the fact that investors withdraw the EPF corpus and waste it away dampens the excitement around this avenue.
Life Insurance Policies
This is one of the most unsuitable products to use for the purpose at hand. For those who are caught in the investment cum insurance quagmire, this will end up being for the most easiest option. However, this is not desirable.
It does not make sense to buy Unit Linked Insurance Plans (ULIPs), endowment plans, moneyback plans and other types of life insurance policies to save tax. These products don’t offer you more than inflation (ULIP might if you stay the course of 10- 15 years). Term plans can of course and should be bought as they are the right products for insurance.
While the premium you pay can be used for tax deduction under Section 80C and while the income is tax free, DTC is mum about how this will change. My advice is to avoid putting in money in the first 3 quarters of the year in insurance policies.
Tax saving mutual funds or ELSS
Tax saving mutual funds or Equity Linked Saving Schemes (ELSS) as they are loosely called are a very good way to save tax for those whose Section 80C limit is not saturated and you cannot park your money in other options available. ELSS have a lock in of 3 years and investing in them is not for the faint hearted as they take an exposure to the stock markets.
Remember to take the systematic investment planing route of ELSS while saving for income tax. I need to caveat the fact that DTC is not very clear about whether the contribution will continue to be accounted for Section 80C benefits. Wait and watch.
5 year Bank Fixed Deposits
Bank deposits for 5 years can be used towards Section 80C tax deduction. Currently, the interest that you can earn is easily a minimum of 9% per annum. Keep in mind the fact that you still need to pay tax on the maturity value that you receive after 5 years, so in that sense, your returns are lower then 9%.
NSC and SCSS
The NSC underwent a change this year. It was shortened to 5 years from 6 years and its interest is now linked to the government yield. There is also a 10 year NSC now on the offing. NSCs will offer you 8.4% this year and the income, like 5 year bank FDs will be taxable after getting added to your income.
Similarly, Senior Citizen Savings Scheme (SCSS) has become market linked and will offer 9% per annum. Senior citizens (those above the age of 60) can invest a maximum Rs 15 lakh in this with a 5 year lockin with a payout which happens every quarter. How I wish, this limit was increased.
New Pension Scheme (NPS)
The NPS was meant to create a wave in this country but seems to have died a death with innumerable tries to revive it. Meant as a retirement planning tool, the NPS invests in both equity and debt. The commissions middlemen earn are paltry so no one is selling it at all.
If one wants to use tax planning with retirement planning, then pension plans offered by insurance companies are also available as an option. Then there are pension plans offered by mutual fund houses as well.
The complete list of smart ways to save income tax in India –
The above mentioned are some smart ways to save income tax, should be used in alignment with your asset allocation. Depending on how much you want to save for the future and your expectation of return, tax planning should be done by investing in these products. Also note that apart from these, there are other sections that should be used to save income tax.
Here is a quick listing of the various Sections available as smart ways to save your income tax this year.
80C –
Payment of Life Insurance Premium (For self, spouse & children)
Contribution to Unit Linked Insurance Scheme – ULIP (For self, spouse & children)
Deposit in Public Provident Fund-PPF (For self, spouse & children)
Purchase of National Saving Certificates – NSC (Self)
Contribution to Equity Linked Savings Scheme (Self)
Payment of tuition fees for children to any School, College, University or Educational Institution
Repayment of Principal of housing loan
Fixed Deposit for 5 years with a Scheduled Bank80CCC – Contribution to Pension Plans (Self)
80CCF – Investment in Infrastructure Bonds
24(2) – Housing Loan – Repayment of Interest (Self Occupied)
80D – Mediclaim Policy Premium (For self, spouse, children & dependent parents)
80E – Payment of interest on loan taken for higher education for a full time course
80DD – Medical treatment of handicapped dependent
80U – Deduction in case of self being totally blind or physically handicapped
Hope the above mentioned smart ways to save income tax will help you to minimize your tax output.
Nice Article Radhey..
Seems to be a nicely compiled report of all your inputs in different articles on this website.. People will surely be benefitted by this.
Thanks..
@Aparna Nema, Glad you liked it Aparna.
Hi Radhey,
Thanks for providing such useful and interesting information. But I have few questions regarding this article.
1: You said it is better to avoid Life Insurance Policies but is this applicable for TERM BASED INSURANCE also?
2: Both bank FD and NSC are fetching almost same interest rate, among them which is better instrument to invest in?
3: Housing loan is missing from this list, don’t you feel is also good option of tax saving?
4: Could you please elaborate more on New Pension Scheme (NPS)?
Regards,
Nikhil Mittal
@Nikhil Mittal, This article is primarily for investing in right avenues to save tax and isn’t essentially a complete guide for tax planning. This seems to be the reason that tax treatment of housing loans, Mediclaim and a host of other stuff is not covered.
Similarly term plans are not covered since they are not investment vehicles in the right sense of the word. Though best in their breed, term plans are pure Insurance products and not an “investment” product.
@Jaswinder Singh, Yeah, but I should have mentioned term plans in the article and have updated it now.
@Nikhil Mittal, No no, one CANNOT avoid term insurance. I will update the article to reflect that.
Between FD and NSC, I will do an article on which is better.
Housing loan is covered in the last complete list.
For NPS, I guess another article is warranted.
I have some homework to do !
@Nikhil Mittal,
(1) Yes. Term insurance is best and its not for tax purpose though. You get additional tax benefit when you put that term insurance.
(2) You know the NSC rates and FD after-tax returns depend on your tax bracket. So, the best one would be different for each and everyone.
(3) Housing loan interest is part of 80C and is shown in the article as well.
(4) For NPS, go through http://manickkam.blogspot.com/2011/12/new-pension-scheme.html and http://manickkam.blogspot.com/2011/12/new-pension-scheme-more-details.html
@Manickkam, Do you invest in NPS Manickaam ? I don’t like the fact that equity is capped at 50% in it. Should have been higher.
@Radhey Sharma, No Radhey. I have some plans to invest though.
@Manickkam, All the best !
Radhey,
Thanks for the post, very good compilation.
As for NPS its performance has been dismissal so far, so it would be better to invest in good peforming MF. For tax part under 80C i feel ppf, epf, term plans and ELSS should be sufficient.
Rakesh
@Rakesh, I would agree with you on the latter part of your statement that PPF, EPFm term plans and ELSS should suffice.
However, I personally feel NPS deserves more attention than it gets currently. It is indeed a very nice retirement tool – it is just that it;s not being marketed properly.
@Radhey Sharma, Rahdey, I am very much agree with you on NPS part.
@Rakesh, Yes, for the tax part, If you want risk, ELSS, PF and term plan, small amount of PPF would be enough. If you don’t want risk, remove ELSS and that would be enough.
Radhey,
Agree that NPS has not been marketed properly but then Govt. has made it compulsory for Govt. employees to open NPS account. I know few of them who are not satisfied with the performance of NPS till date.
Moreover there is not trust in the government because of scams/corruptions.
Why should i deposit my hard-earned money in NPS when i have no confidence in its fund managers.
Rakesh
@Rakesh, Valid point.
But NPS is managed by professional fund houses, in that sense, that professionalism is there.
It will pick up sometime in the future after DTC kicks in as tghe govtr is making NPS and PPF very attractive in the DTC.
@Rakesh, But, you have the option of switching to different kind of funds in NPS and recently they have assured 8.6% returns, where it would act like PPF. And you have the option of switching to equity when you feel that equity would do well.
Remember the lock-in period and you will obviously see the advantages. For the returns in the past, please go through the articles, http://manickkam.blogspot.com/2011/12/new-pension-scheme-more-details.html
@Manickkam, Yeah, fully agree with Manickkam. It is an awesome avenue to be used, should be used more intelligently by one and all.
Hopefully the DTC will give a BIG push to it.
@Manickkam,
Yes, I agree that we can switch to different kind of funds in NPS but many investors would not know when to switch to maximize returns. Moreover as of now they have a cap of 50% on Equity. An investor in his 20-30’s would want this cap to be over 75%.
Let’s look at its performance for the next few years and we can make a call whether to invest or now.
As of now I am not comfortable to invest in NPS.
Rakesh
@Rakesh, Its just a kind of investment vehicle if you are risk averse.
Hey Radhey you have presented a good one at the right time. A simple article yet an effective one.
I sometime wonder, millions of people pay income tax but a most of it go in the pockets of politicians, bureaucrats, big contractors & other Govt officials as black money and very little goes for the development of the country. So why should one pay his/her hard earned money to fill the safe of some crooks?
Tell me if I’m wrong.
@Sudip D, Well, I don;t want to start a war here but by law we are mandated to pay the tax so we have to.
It does go waste and should ideally be used for India’s development – this is where we need to be more ethical but who will tell these to the politicians.
You are right.
@Radhey Sharma, That’s such an OBLIGATION!!
This article actually shares smart ways to save income tax. Thanks for taking efforts to explain these things in such simple and effective way so that even person from non finance sector can take benefit from this.