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11 tax-savers to pick from

business Updated: Jan 17, 2010 23:08 IST
Monika Halan
Monika Halan
Hindustan Times
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Did you know that there are several other—non-insurance—products that can get the same tax benefit that an insurance policy does? Even within insurance, there are plans that get tax deduction and work better as a life cover. But these remain the financial world’s best kept secrets.

Here’s a run down of products that get you the Rs1 lakh deduction. In some cases, you don’t even need a further outflow of money to get this tax break, you can claim it on existing investments. We’ve split the products according to the risk-return attributes and spending.

Zero-risk products

These carry either a government guarantee or have a fixed interest payout. The first two products should form the core of your 80C investments. And if you exhaust the entire limit in this, no need to buy more.

1. Employees’ Provident Fund (EPF): The first scheme that you get to buy the minute you begin work as an employee. Under this, 12% of your basic (including dearness allowance and retaining allowance, if any) goes to this fund and your employer matches this by 12% of his contribution. From your employer’s contribution, 8.33% goes towards the Employees’ Pension Scheme (EPS) and 3.67% to EPF. Your EPF earns a tax-free interest that is currently 8.5% a year. It’s not a good idea to reduce your PF contribution, as some employers may suggest, since you get an investment option that is one of the best in India in terms of risk- and tax-free return.

Return 8.5%

Duration working life

Safety zero risk

2 . Public Provident Fund (PPF): An 8% 15-year cumulative recurring deposit that is fairly illiquid and is good to use as a long-term corpus building tool. Risk- and tax-free today, maximize your contribution to Rs70,000 this year, irrespective of whether you need the tax break or not. The new direct tax code rules will apply from next year and we don’t know the exact treatment of old accounts today. Rs70,000 a year for 15 years at 8% will give you Rs19 lakh. Tax free.

Return 8%

Duration 15 years

Safety zero risk

3. National Savings Certificate (NSC): Through this, Rs1 lakh grows to Rs1.6 lakh in six years. The interest generated each half year is treated as “reinvested” and becomes part of your overall 80C contributions. But if you have exhausted the cover, you need to pay tax on the interest.

Return 8%

Duration 6 yrs

Safety zero risk

4. Fixed deposits for a duration of five years with banks and post offices: One of the bug bears senior citizens had with section 80C was that it leaned towards the younger generation by giving tax breaks for long-term corpus building products or on home loans. There was nothing that allowed a retired person to earn an income and yet get a tax break. The extension of specific five-year bank and post office deposits to come under section 80C fills this gap. The current rate of interest is between 5.70% and 8.25% a year.

Return 5.70-8.25%

Duration 5 years

Safety zero risk

5 . Senior Citizens Savings Scheme (SCSS): It allows a retired person having a lump sum to invest it at a reasonably good interest rate. If you are 60 years old (or took voluntary retirement at 55), you can put up to Rs15 lakh for five years in this scheme, earn 9% interest a year and get the 80C benefit on Rs1 lakh. Interest, however, is taxable.

Return 9%

Duration 5 years

Safety zero risk

Market-linked

products

6 . Equity-linked savings schemes (ELSS): These are diversified equity mutual funds that allow investors with risk-taking ability to target a higher return. You are locked into the investment for three years, but the long-term capital gains are zero tax.

You can choose a lump sum investment route or a systematic investment plan. The average return in an ELSS scheme over the last three years was 8% and over the last five years was 22%. Or Rs1 lakh invested five years ago will be worth Rs2.7 lakh today . Look out for a full review on Tuesday.

Return market-linked

Duration 3-year lock-in

Safety market and fund

Manager risk

7 . Unit-linked insurance plans (Ulips): A hybrid product that includes an insurance cover on your life along with a market-linked investment plan. The premium needs to be paid for a minimum of five years. Ulips work only in the long run of over 9-10 years. Given the non-transparency and non-portability of the product in its current state and sustained mis-selling in the industry, we do not recommend that you use this vehicle for your 80C tax break. Look out for more details on Ulips and other insurance plans on Wednesday.

Return market-linked

Duration 5-year lock-in

Safety market and fund manager risk

8. New Pension System (NPS): This is a new, market-linked vehicle for those who do not have an EPF facility to target long-term retirement planning. Money Matters likes the product due to zero front loads, tiny annual charges, full portability between schemes and fund managers. Although NPS comes under section 80CCD, the available deduction is up to Rs1 lakh under section 80C. Look out for a full review on Thursday.

Return market-linked

Duration lock-in till age 60

Safety market and fund

Manager risk

Spending-linked

Starting life with a home loan, a car loan, a furniture loan, kids’ fees and other runaway expenses? You can actually use two of your expenses to fill the 80C tax break bucket, without spending more.

9. Tuition fees: School fees of up to two kids (trust the government to push its two-kid agenda in tax break deals as well!) can become part of your section 80C tax kick. Pay by cheque and keep the receipts to file along with your return.

10. Principal on home loan: Up to Rs1 lakh of the principal on your home loan can be used as a deduction. Spouse is a co-owner and borrower? You can claim double that.

Special case of insurance

11 . Life insurance premium: Anybody who’s been working for over 10 years is holding a minimum of two to three life insurance policies. The first one will have a premium of around Rs5,000, the next could be Rs10,000 and a more recent one could be Rs60,000 a year. Tot up the total sum assured or life cover, and you find you are holding under Rs 10 lakh of life cover.

The flaw is firmly in the manner in which life insurance has been sold in India all these years—as a tax-break. It was not what cover you needed, but what you needed to save to get the tax break decided the premium.

So, we hold endowment and money-back plans that carry a return of 3.5-4%. We would have been better off holding a PPF account. But the agent never told us. The only insurance cover you need to cover your life is a term insurance policy. New policies in the market cost as little as Rs10,000 a year for a Rs50 lakh cover. The premium comes under 80C as well. So, no more insurance this year.