Its that time of the year when you start shopping for the best available tax saving plan. One of the reasons why tax saving schemes are popular is that not only is the invested amount exempted from tax, but the revenues generated in some cases are also tax free subject to prescribed limits.
While there are a number of tax saving instruments, the choice essentially is among returns, lock-in period and the tax shelter offered. There is no one-size-fits-all saving instrument. Depending on the age, risk profile and tax protection needed an individual can select the best investing vehicle.
Firstpost takes a look at various instrument within this parameter.
1. Employee Provident Fund (EPF)
It is a retirement benefit fund open to salaried employees, where the employee and the employer both contribute to the fund on a monthly basis. Twelve percent of the person’s basic salary gets deducted at the month’s end while the employer contributes 12 percent directly to the fund.
Returns: Decided by the EPFO, for 2010-11 it is 9.5 percent
Maturity: Withdrawal of entire amount on retirement, VRS or change of job. Transfer of EPF is also possible from one company to another in case of a shift of job. Partial withdrawal is also permitted during the years of service.
Reuters
Tax exemption: This scheme offers a total yearly exemption of Rs 1,00,000 under Section 80C of the Income Tax Act. However, withdrawal is taxable if it is done within five years of employment.
Firstpost Comment: This is investment by default as 24 percent of the basic salary is accumulated monthly and offers a good lumpsum amount at the time of retirement. The biggest advantage is the discipline of investment as the amount is deducted at source. As EPF rates are generally higher than a public provident fund, or PPF, and the fund is open only to the privileged employees, it makes sense to invest maximum possible in EPF’s.
2 Public Provident Fund (PPF)
Public Provident Fund is a statutory scheme of the central government with an objective of providing old age income security to workers in the unorganised sector.
Returns: 8.6 percent (rates are changed periodically)
Maturity: Fifteen years extendable to a block of 5 years. No withdrawals allowed. However, investors can avail of loan to the tune of 50 percent of the balance of the fourth year but this can be availed only from the sixth year.
Tax exemption: This scheme offers exemption under section 80C. Amount not taxable on maturity.
Firstpost Comment: Biggest drawback is the lock in nature of the investment and the long tenure. However, for unorganised workers this offers a decent investment return. Further, there is a maximum limit of Rs 70,000 that can be invested in a year.
3. National Saving Certificate (NSC)
This scheme is specially designed for government employees, businessman and other salaried class employees who are tax assesses.
Returns: 8 percent compounded half yearly
Maturity: 6 years
Tax exemption: Exemption available under section 80C
Firstpost Comment: There is no upper limit on the investment as compared to a PPF. Moreover it is compounded half yearly and has a smaller lock-in tenure of six years. The biggest negative of the instrument is that interest income earned is taxable, but it is eligible for deduction under 80C.
Continues on the next page