In Tax planning in easy steps, I spoke about the need to implement your tax planning at the start of the financial year. Over here, I am going to be advising investors on the best options for those who are averse to risk.
1) PPF: Public Provident Fund
This one is by far the most popular since it targets all age groups, offers an assured return and provides the highest safety, being backed by the government. However, the tax benefit that this avenue offers is its main forte. Contributions up to Rs 1 lakh in a financial year qualify for deduction under Section 80C of the Income Tax Act. What’s more, even the interest earned is exempt from tax.
Though the returns are assured and compounded annually, it should be noted that the actual rate is subject to revision. At the start of the financial year, the government fixes the rate of return and has pegged it at 8.7% per annum for the current financial year.
PPF runs over a 15-year period and during this time, the investor will have to make annual contributions. The minimum contribution is Rs 500 and goes up to Rs 100,000 in a financial year. The deposits can be made in lumpsum or installments up to maximum 12.
2) NSC: National Savings Certificate
Its popularity could be attributed to the lower investment horizon, as compared to the PPF. The NSC VIII Issue is for 5 years and the NSC IX Issue is for 10 years. Like PPF, the rate of interest is fixed by the government at the start of the financial year. Currently, it is 8.5% (NSC VIII) and 8.8% (NSC IX).
The rate of interest is compounded on a half-year basis and payable on maturity. However, the rate of return is locked at the time of investment and remains insulated from any later changes in rates.
There is no maximum limit for investment though investments up to Rs 1 lakh only are eligible for exemption under Section 80C. Moreover, the interest accruing annually is deemed to be reinvested, hence it also qualifies for deduction under Section 80C (totaling Rs 1 lakh per fiscal year).
3) SCSS: Senior Citizen Savings Scheme
This scheme is targeted at individuals aged 60 years and above. The rate of return earned on this scheme is 9.20% and calculated on a quarterly basis. High and assured returns, safety and the tax benefit make it a perfect investment choice.
This is an excellent option for those who would like to avail of the interest payment every quarter. But do note, interest earned is fully taxable. You can invest up to Rs 15 lakh in SCSS though the exemption under Section 80C is limited to Rs 1 lakh only.
The lock-in period is not long – 5 years which can be extended for an additional 3 years.
4) POTD: Post Office Time Deposit
You can open a variety of deposits at the post office but not all will get you the tax benefit – just the 5-year tenure deposit.
The lock-in periods are varied: 1-, 2-, 3- and 5-year deposits. Just like the above two, the return is fixed at the start of the fiscal year. This year it is 8.4% for each tenure and 8.5% for the 5-year deposit.
While the interest earned is subject to tax, the investment is eligible for a deduction under Section 80C. The interest is payable on an annual basis but compounded quarterly.
5) FD: Bank Fixed Deposit
Fixed deposits are extremely popular with investors across all spectrums. Just like the 5-year deposit from the post office, such deposits from banks are also eligible for a deduction under Section 80C. But do note, the tenure of the deposit has to be 5 years. The return is fixed and guaranteed but subject to tax.