Taxation

Tax Saving Investment Picks for 2018

9 min read

Jan 3, 2018

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Adios 2017 and

Hola 2018!

As you bring in the New Year, investments and taxes may not be on the top of your mind. But sooner or later, employers will be reminding their employees to submit the investment declaration proofs to claim a tax rebate.

Yes, the start of the calendar year also kicks off the tax-saving season.

Though this may not be the best time to start tax planning, but in order to save tax, many scurry around for investment options under Section 80C of the Income Tax Act.

[Also Read: Income Tax Slabs for 2020-21]

Section 80C covers a wide range of options from fixed income investments to market-linked instruments. Some investment products are hybrid in nature, giving you an option to invest in a mix of equity and debt.

In hindsight, 2017 was clearly the year of equities. The S&P BSE Sensex was up nearly 30% over the past year, outshining fixed income products by a wide margin. However, over a three-year period, the index generated a compounded return of just about 7.54%, owing to a higher base effect.

On the other side, interest-bearing fixed income products writhed under the falling interest rate regime. Though the Reserve Bank of India (RBI) cut rates just once, falling bond yields led to a drop in interest rates across fixed income products.

From FY2016-17 onwards, the government linked the interest rate on small savings schemes to the yields on government securities. Interest rate reviews now happen every quarter. Over the past 15 months, the government revised the interest rate of small savings schemes downwards, as many as five times.

The interest rate on Public Provident Fund (PPF) has dropped by as much as 110 basis points, from 8.7% for the year ended March 2016 to 7.6% for the quarter ended March 2017.

Given that the equity markets have soared to new heights and interest rates on small savings schemes have touch multi-decade lows, choosing the ideal investment avenue is difficult.

Though equity markets have enjoyed a tremendous rally, the volatility can be a deterrent to risk-averse investors. Given the low interest rates on fixed income products, such investors may have to settle for low yielding investments.

Hence, it is necessary to set up appropriate asset allocation when investing in tax-saving products as well. Based on your risk-profile and investment horizon, invest in a mix of equity and debt products. Thus, you capitalise on the wealth creation potential of equity, as well as cushion the portfolio with the stability of interest-bearing assets. All this while saving on tax as well.

Let us have a look at the different tax-saving investment products available that enables you to make an informed choice.

The list of investment avenues for deduction under Section 80C consists of both market-linked and assured-return investment instruments.

Fixed Income Instruments

Non-Unit Linked Life Insurance
Insurance Pension Plans
Public Provident Fund (PPF)
Voluntary Provident Fund (VPF)
Sukanya Samriddhi Account
National Saving Certificate (NSC)
5-Year fixed deposits with banks, Post Office
Senior Citizens Savings Scheme (SCSS)

Market-linked Instruments

Equity Linked Savings Schemes (ELSS)
Mutual fund linked pension plans or Retirement Funds
Unit-Linked Insurance Plans (ULIPs)
National pension scheme (NPS)

Tax Saving with “assured return” instruments

Tax saving instruments providing assured returns are…

Non-Unit Linked Life Insurance Plans
- Life Insurance plans can be broadly classified as “pure term life insurance plans” and “investment-cum-life insurance plans.”
- Pure term life insurance plans are authentic indemnification plans, as they cater only to the need of only protection (the death benefit) and not investment (maturity benefits).
- Investment-cum-life insurance plans on the other hand, as the name suggests, offer you an investment benefit along with insurance. The premiums for such plans are naturally higher, owing to the investment component. Endowment plans and money-back plans are some examples of non-unit linked life insurance plans.
Public Provident Fund
- The Public Provident Fund (PPF) is one of the most popular fixed income investment in India. It can also be linked with your savings account. PPF is a Government-backed, long-term small savings scheme which was initiated to provide retirement security to self-employed individuals and workers in the unorganised sector.
- If you are keen on a safe corpus, earning a decent tax-free rate of return, enjoying tax benefit; then PPF is for you. The contributions (i.e. investments) made to the PPF account will earn a tax-free interest and the maturity proceeds are exempt from income-tax.
- To make the most of your PPF investment, be disciplined. You also need to find another way to meet your liquidity needs. That’s because under this investment avenue your money is blocked for a good 15 years.
- PPF offers loans against the account that can also help you during occasions such as a wedding in the family, higher education of your children, etc. Above all, it gives you a peace of mind as your money is safe.
- Estimated returns:
  - The interest rate payable is set by the government and is linked to the prevailing G-sec yields of similar maturities. The interest rate is reviewed every quarter. The interest rate decided for the March 2018 quarter is 7.60% p.a.
- Taxability:
  - Interest earned is exempt from tax and so are the maturity proceeds
Voluntary Provident Fund (VPF)
- The Voluntary Provident Fund (VPF) is an add-on to the Employee Provident Fund (EPF). Here, a salaried employee can choose to contribute an additional amount from his salary to the Provident Fund account. As a salaried employee, you are investing anyway — 12% of the basic and dearness allowance toward the EPF.
- The employer matches the contribution by the exact amount. You cannot increase your EPF contribution, but you do have the choice of contributing more, by voluntarily investing in the VPF. The interest rates and withdrawal terms remain the same as that of the EPF. There is no separate account for VPF. All contributions and interest is transferred to the EPF Scheme account.
- Estimated returns:
  - For the financial year 2016-17, EPF has fixed a rate of 8.65%, which is about 100 basis points higher than the PPF rate. The EPF interest rate is decided annually. The interest rate for 2017-18 has not been announced yet. Many investors are expecting for rates to be lowered.
- Taxability:
  - Interest earned is exempt from tax and so are the maturity proceeds
National Saving Certificate (NSC)
- The NSC is a scheme floated by the Government of India, and one can invest in this through his/her nearest post office, as the scheme is available only with India Post. The certificates can be made in your own name, jointly by two adults, or even by a minor (through the guardian), and has a tenure of five years. The accrued interest, which is deemed to be reinvested in a financial year, qualifies for a deduction under Section 80C for the respective financial year.
- Estimated returns:
  - At present, the five-year NSC offers a 7.6% rate of interest compounded annually, for the Q1, March-May, FY 2018-19. As is the case for all small saving schemes, the rate of interest of NSC is reviewed every quarter based on the G-Sec yields of the previous quarter. The interest income accrues annually and is reinvested in the scheme till maturity or until the date of premature withdrawals.
- Taxability:
  - The interest income is chargeable to tax in the year in which it accrues. There is no tax deducted at source.
5-year Tax Saving Bank Fixed Deposit and 5-Year POTD
- The 5-Year tax saving bank fixed deposit, is eligible for a deduction under Section 80C. It comes with a lock-in period of five years, which in fact is good to compound wealth. The minimum amount that you can invest is Rs 100 with an upper limit of Rs 1.50 lakh in a financial year.
- Estimated returns:
  - The rate of interest varies.
- Taxability:
  - The interest is subject to TDS; but again, you can submit a declaration in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens) as applicable for not deducting tax at source.
- Similarly, five-year Post Office Time Deposits (POTDs) accounts can be opened either in single name, jointly, or even in the name of a minor (through a guardian) who has attained the age of 10.
- The minimum investment amount is Rs 200, and there is no ceiling limit. As far as premature withdrawals are concerned, they are permitted only after one year from the date of deposit. The interest on such deposits shall be 1% lower than the rate specified for a five-year deposit.
- Estimated returns:
  - A five-year POTD earns a rate of interest of 7.4% p.a., calculated quarterly, but paid annually. The rate of interest is reviewed every quarter based on the G-Sec yields with similar maturities of the previous quarter.
- Taxability:
  - Interest earned on your investments is taxable. There is no tax deducted at source.
Senior Citizen Savings Scheme (SCSS) Account
- If you are 60 years and above, you are eligible to invest in SCSS. Moreover, if you are 55 years and have retired under a voluntary retirement scheme (VRS), you are eligible to enjoy the benefits of this scheme.
- You can do a one-time deposit under this scheme subject to the minimum investment amount of Rs 1,000 and a maximum of Rs 15 lakh. The maturity period provided for SCSS is five years and the interest is payable on a quarterly basis (i.e. on March 31, June 30, September 30 and December 31) every year from the date of deposit.
- After maturity, you can extend the SCSS account for a period of three years, but within one year from the maturity, by giving an application in a prescribed format. Premature withdrawals are permitted only after one year from the date of opening the account. If you withdraw between 1 and 2 years, 1.5% of the initial amount invested will be deducted. And in case if you withdraw after 2 years, 1.0% of the balance amount is deducted.
- Estimated returns:
  - Currently, the SCSS offers an interest @ 8.30% p.a compounded quarterly and reviewed every quarter based on previous quarter G-sec yield.
- Taxability:
  - The interest you earned is subject to a tax deduction at source (TDS). And if you do not earn an income apart from the interest income, then in order to avoid TDS, you can submit a declaration in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens) as applicable.
Sukanya Samriddhi Account
- The Sukanya Samriddhi Account allows you to save and invest for your daughter’s education and marriage. As parents or a legal guardian, you can open Sukanya Samriddhi Savings account in the name of the girl child from her birth upto her age of 10. After the girl turns 18, she is entitled to operate the account herself.
- SSA can be opened for a maximum of two girl children following the KYC norms. The minimum deposit is Rs 1,000 while a maximum of Rs 1.50 lakh in a financial year. Deposits in SSA can be made till the completion of 14 years, from the date of opening of the account. 50% of the balance lying in the account as at the end of previous financial year can be withdrawn, when the girl child turns 18, for the purpose of higher education, future financial planning, etc.
- The account will mature after 21 years, from the date of opening of the account. However, if the marriage of the daughter takes place before completion of 21 years, the account needs to be prematurely terminated.
- Estimated returns:
  - Currently, the rate of interest for SSA is 8.1% compounded annually. Like other small saving schemes, this interest rate is reset every quarter based on previous three month G-sec yield.
- Taxability:
  - Interest earned is tax-free.

Let’s summarise the fixed income investment options under Section 80C below:

Instrument	Lock-in Period / Policy Term	Estimated returns	Taxability
Non-Unit Linked Life Insurance Plans	5 years to 30 years	4%-7% depending on policy chosen	Maturity proceeds are tax-free
Public Provident Fund	15 years	7.6%, linked to G-sec yields, reviewed every quarter	Interest earned is tax-free
Voluntary Provident Fund	Till retirement	8.65%, reviewed every year	Interest earned is tax-free
National Saving Certificate	5 years	7.6%, linked to G-sec yields, reviewed every quarter	Interest is taxable. No Tax Deducted at Source (TDS)
5-yr Bank/PO Deposit	5 years	6%-7.5%, differs from one financial intermediary to another	Interest is taxable and is subject to TDS if total interest is Rs 10,000+
Senior Citizen Savings Scheme	5 years	8.3%, differs from one financial intermediary to another	Interest is taxable and is subject to TDS if total interest is Rs 10,000+
Sukanya Samriddhi Account	21 years	8.1%, linked to G-sec yields, reviewed every quarter	Interest earned is tax-free

Hence, based on your investment requirement and liquidity needs, you can invest in the tax-saving product of your choice. The PPF offers decent returns, however, the lock-in period is 15 years. Likewise, though the VPF offers a much higher rate, your investment is locked until retirement. Even for those eligible for SSA, while the high returns are attractive, the low liquidity can be a deterrent.

SCSS is a good option for senior citizens. Other investors, with a timeframe of up to five years, can opt for five-year tax-saving bank deposits or the National Saving Certificate, after comparing the interest rates.

Tax Saving with market-linked instruments

Tax saving instruments providing market-linked returns are…

Equity Linked Savings Schemes (ELSS)
- Equity Linked Savings Scheme or ELSS are diversified equity mutual funds providing tax saving benefits. A distinguishing feature about ELSS is that they are subject to a compulsory lock-in period of three years. The minimum application amount for most of these is as little as Rs 500, with no upper limit.
- With ELSS, you can make either a lump sum investments or invest via Systematic Investment Plan (SIP) – a mode of investing in mutual funds. In case of the latter, each instalment has a three-year lock-in period. In order to buffer the shocks of volatility in the equity markets, you can adopt the SIP route of investing which will provide you the advantage of “compounding” along with “rupee-cost averaging”.
- While considering an ELSS mutual fund for your market-linked tax-saving portfolio, give importance to those equity linked savings schemes that have a consistent performance track record and follow robust investment processes & systems at the fund house.
- Estimated returns:
  - The long-term average return over 10 years ranges between 12%-14% for equity funds. Being market-linked, the returns would vary based on prevailing market conditions.
- Taxability:
  - Gains are tax-free on units held for greater than one year.
Pension Funds
- Pension funds (or retirement funds) offered by mutual funds can not only be used for tax planning, but as an effective instrument to plan an independent retired life. These plans come with a five-year lock-in and an exit load that can extend up to retirement.
- Most pension funds are hybrid in nature. At the vesting age, you can opt for regular pension by systematically redeeming the units. They are suited if you want to get two birds with one stone, namely, tax planning and retirement planning.
- Some Pension Funds may be unable to maximise wealth as a dominant portion of the assets is skewed towards debt. Also, debt-oriented schemes aren’t very tax efficient due to liability of LTCG tax. You may consider schemes offering a “Wealth Creation” plan, which invest over 65% of the portfolio in equity.
- Estimated returns:
  - The long-term average return from equity over 10 years can range between 12%-14% for equity funds. The returns vary based on prevailing market conditions. The returns on a hybrid asset allocation will depend on the asset allocation you have decided.
- Taxability:
  - For equity-oriented schemes, the gains are tax-free on units held for greater than one year. For non-equity schemes, where the average equity exposure over the financial year is below 65%, long-term capital gains on units held for over 36 months are subject to 20% tax with indexation.
Unit-linked Insurance Plans (ULIPs)
- Insurance-cum-investment plans that enable you to invest in equity and/or debt instruments. All you simply need to do is, select the allocation option as provided by the Unit-linked Insurance Plan (ULIP). Generally, fund options are classified as “aggressive” (which invests in equity), “moderate or balanced” (which invests in debt as well as equity), and “conservative” (which invests purely in debt instruments).
- Hence, apart from the insurance cover, which is usually 10 times your annual premium offered under these plans, the investment returns are completely market-linked. After accounting for administration and other charges, the premium amount is invested according to the investment objective of the fund chosen.
- To track the performance of such funds, the NAV is declared on a regular basis. These policies have a minimum five-year lock-in period, and also have a minimum premium paying term. The overall term of the policy would vary from product to product. To claim a tax benefit, the policy has to be active for a minimum five years.
- If ULIPs are well-selected, they can generate wealth for you in the long run and accomplish your financial goals.
- Estimated Returns:
  - The returns are dependent on the category of fund chosen. Other costs such as policy administration charges, premium allocation charges, etc., can eat in to returns in the initial policy years.
- Taxability:
  - Being an insurance policy, the sum assured or surrender value is tax-free.
National Pension System
- Any individual between the ages of 18 - 65 years and belongs to the unorganised sector (i.e. private sector) is eligible toinvest in the NPS. The contributions are voluntary and you can invest in any of the two under-mentioned accounts:
- Tier-I Account –
  - This account is a mandatory account and the minimum investment amount is Rs 500 per contribution and Rs 1,000 per year. If you do not contribute the minimum yearly contribution, the account will be frozen. And to unfreeze the account, you need to contribute the total sum of minimum contributions missed and a penalty of Rs 100 per year.
  - Under this account, premature withdrawals are not actually permitted before 60 years of age; however, it can be allowed only in the form of repayable advance and only if you’ve completed 15 years.
- Tier-II Account –
  - This account is a voluntary account. To have Tier-II account, you first need to have a Tier-I account. The tier-II account can be opened with minimum contribution is Rs 1,000.
  - From the Tier-II account, you are permitted to withdraw as and when you wish to. However, since this account does not have a lock-in period for funds to be invested, it is unavailable for a tax benefit. Even if you hold both the accounts under NPS, only the Tier-I account will be eligible for tax benefits.
- While investing money in NPS, you have two investment choices, i.e. “Active” or “Auto” choice.

Under the “Active” choice asset class, your money will be invested in various asset classes termed as ECG, viz. E (Equity), C (Credit risk bearing fixed income instruments other than Government Securities), and G (Central Government and State Government bonds). This gives you the option to decide your asset allocation into these specific asset classes.

In case of Auto Choice, which is the lifecycle fund, money will be automatically invested based on the age profile of the subscriber.

And if you don’t signify the choice while investing, the Auto Choice will be the default option.

In November last year, the PFRDA introduced two new investment options called: 'Aggressive Life Cycle Fund' and 'Conservative Life Cycle Fund'.

In the former, you can invest up to 75% in equities.

In the latter, 25% will be parked in equities.

The purpose of introducing these additional investment options was to attract young investors who can afford to take the risk and for the risk-averse investors.

Non-Resident Indians (NRIs) can now actively participate in NPS.

Exit option for NPS:
- At the age of 60, you can exit NPS. However, you are required to invest a minimum 40% of the fund value to purchase a life annuity. And the remaining 60% of the money can be withdrawn in lump sum or in a phased manner upto your age of 70 years. However, if the corpus is less than Rs 2 lakh, a withdrawal of the full amount is permitted.
- For exit from NPS before the age of 60, compulsory annuity of minimum 80% of fund value need to be purchased. The remaining 20% of the money can be withdrawn. But if the corpus is less than Rs 1 lakh, complete withdrawal is permitted.
- At the time of death of the subscriber, the entire accumulated corpus (i.e. 100%) will be paid to the nominee or legal heir. There will not be any purchase of annuity and the entire proceeds received will be tax free in the hands of the nominee/legal heir.
- In the Union Budget 2015-16, Government inserted a new sub section 80CCD(1B) in section 80CCD which provides additional deduction of Rs 50,000 for contribution made by individual assessee under the NPS (On this additional contribution, the celling of Rs 1.5 lakh under section 80CCE is not applicable).
- Estimated returns:
  - The returns are dependent on the asset class/fund chosen. NPS comes with an extremely low fund management charge, which is an added advantage for long term investors.
- Taxability:
  - As per current tax laws, 40% of the money withdrawn on maturity is taxable.

Let’s summarise the fixed income investment options under Section 80C below:

Instrument	Lock-in Period / Policy Term	Estimated returns	Taxability
Equity Linked Savings Scheme	3 years	10-year average returns: 12%-14%	Tax-free for a holding period above 1 year
Pension Funds	5 years	The returns would vary based on underlying asset allocation to equity and debt	For equity-oriented schemes, the gains are tax-free on units held above 1 year. For non-equity schemes, where the average equity exposure is below 65%, gains on units held above 3 year are subject to 20% tax with indexation benefit.
Unit-linked Insurance Plans	Minimum 5 years	The returns would vary based on underlying asset allocation to equity and debt	Sum assured or surrender value is tax-free after five policy years.
National Pension System	Till age 60	The returns would vary based on underlying asset allocation to equity and debt	40% of the money withdrawn on maturity is taxable as income.

As you can see from the table above, ELSSs are the most liquid as the investment can be withdrawn after three years. However, you should remain invested in ELSSs for at least five years or more. Pension Funds are a good option for retirement. You need to pick the right scheme as per your risk profile.

Like mutual funds, ULIPs need to be carefully picked. Ensure to look at the performance of the underlying funds before investing your money. Costs, too, should be on a lower side.

NPS is a good retirement product. However, more can be done to make it more attractive for investors. The additional tax benefit on an investment of Rs 50,000 over and above the Section 80C limit gives it an advantage over other retirement products.

To conclude…

Begin 2018 on the right note and choose appropriate tax-saving investments. If you are unsure what to pick, consult an investment counsellor or wealth manager.

Apart from the investment options, you can save tax through other routes. You can opt for a health insurance to financially secure yourself and your family in a medical emergency, and save tax on the premium paid. The interest and principal paid on home loans qualifies for tax rebates as well. Those availing of an education loan can avail a rebate on the interest paid. Thinking beyond Section 80C may help you save more for your other financial goals.

Begin your tax planning early in this financial year to avoid stress.

Wishing you a bright and prosperous 2018!

Happy Investing!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.

Savings bonds is another investment options ot choose from.