Tax planning: 9 wise ways to park your money

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.

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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.

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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.

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4. Equity Linked Saving Scheme (ELSS)

Tax saving mutual funds that generate decent long-term equity return (depending on market conditions). It is a good combination of a tax saving scheme which gives the benefit of a mutual fund return.

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Returns: No assured returns, depends on market conditions.

Maturity: Lock in period is of three years, but investors can continue to stay invested as in any other mutual fund.

Tax exemption: Exemption available under section 80C

Firstpost Comment: A good investment vehicle in the earlier stage of life as this type of investment has the potential to result in a loss of capital, though at the same time returns can be much higher than any other form of investment.

5. Unit Linked Insurance Plan (ULIP)

ULIP gives the benefit of a combination of tax planning, insurance and investment tool. It is a periodic investment tool, where the choice of investment can be monthly, quarterly or yearly. It also gives the investor an option to invest in either a equity-centric plan or debt centric plan.

Returns: No assured returns, depends on market conditions.

Maturity: Lock in period is of five 5 years, but investors can continue to stay invested as in any other mutual fund.

Tax exemption: Exemption available under section 80C

Firstpost Comment: A good investment instrument, which can protect substantial amount of capital if one choses a plan which invests substantial portion of the premium in debt rather than equity. However, an investor is advised to check on the commission that is deductible and the actual amount that will be invested.

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6. Tax Saving Bank Fixed Deposit Schemes

It is like a normal bank fixed deposit but has the additional advantage of claiming tax deduction.

Returns: Depending on the bank rate of interest varies between 9 and 9.5 percent.

Maturity: 5 years

Tax exemption: Exemption available under section 80C. Interest income is taxable.

Firstpost Comment : Has the advantage of a higher rate of interest through the fixed deposit route, however, the negatives are a lock-in period and taxability of interest income.

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7. Infrastructure Bonds

These are issued by infrastructure companies and are rated by a rating agency. This instrument offers an investor an income tax benefit apart from the normal deductions.

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: Depends on the issuing company

Maturity: 10-15 years with a lock in period of 5 years

Tax exemption: Exemption available under section 80C with a further income tax advantage of Rs 20,000 over and above the Rs 1,00,000 limit.

Firstpost Comments: The biggest advantage is the incremental tax cover of Rs 20,000 and the relatively higher interest rates.

8. Life Insurance Premium

Life Insurance Premium offer the safety of an insurance product at the same time the benefit of tax saving.

Returns: Depending on the policy it is around 6-7 percent. Term policies do not give any return but only offer life cover.

Maturity: Depends on the policy

Tax exemption: Restricted to 20 percent of the initial amount invested

Firstpost Comment:Not so good in terms of returns but gives the benefit of a tax saving instrument and higher insurance cover plus some returns.

9. Post Office Saving

A reasonable saving instrument, especially to the self employed and those living in small towns with limited banking and financial market exposure.

Returns: Depends on the scheme which can touch a high of 8-8.6 percent

Maturity: Depends on the policy

Tax exemption: Exemption available under section 80C

Firstpost Comment: Not too popular as the returns are lower compared to the benefits offered by other instruments.