If you want to save tax and get returns as well, investment instruments are the best because they assure guaranteed returns while providing an opportunity to save tax. You can invest a maximum of R1 lakh in all these instruments put together and the entire amount of R1 lakh will be deducted from your taxable income.
However, what instrument you choose should be driven by overall financial planning and not by taxes alone. “If you require a higher rate of return and have the ability to take risk then you should go with equity products and in case you are conservative, go for debt products that qualify for tax benefits,” said Amar Pandit, a Mumbai-based financial planner.
Under section 80 C of Income tax 1961, you can avail an exemption on income tax on amounts of up to Rs 1 lakh per annum. Public Provident Fund (PPF), Employee Provident Fund (EPF), tax-saving bank fixed deposits, National Savings Certificates (NSC) and senior citizens savings schemes and Equity linked Saving Schemes (ELSS) of mutual funds are the instruments one can invest in this category.
Take a look at what they offer
PPF: An interest rate of 8% per annum, with the maximum investment restricted to Rs 70,000 a year and mandatory investment tenure of 15 years. Interest received on the maturity is exempt from tax.
EPF: An interest rate of 9.5% (for 2010-11). Interest received on maturity is exempt from tax.
NSC: Interest rate of 8% compounded half yearly. Lock-in period of six years. Interest is taxable.
Tax saving bank fixed deposits: Though interest rate vary among banks interest rates are in the 8-9% range, compounded quarterly. Interest on maturity is taxable. Lock-in period of five years.
Senior citizen savings schemes: Interest rate of 9% a year payable quarterly. For citizens over 60 or those 55 or above who have opted for eligible voluntary retirement schemes.
ELSS: These carry market risks with prospects of higher returns. Minimum lock-in period of three years.
Experts say those below 30 should put 70 to 100% of their tax-saving investments in ELSS and those between 30 and 50 should invest 50% each in ELSS and fixed-income instruments, while those above 50 should put 30% in ELSS.