Tax-saving Investments

Are You Saving Enough Tax By Investing In NPS?

Most investors are unaware of this tax exemption under 80CCD(1B) popularly known as NPS(National Pension Scheme). Investing in NPS comes with a lock-in until the age of 60.

What are the benefits of NPS?

  1. Can save additional tax apart from investment in 80C(1.5 Lakhs). Investors can invest up to 50 thousand to claim this tax exemption.
  2. Consider this as a retirement product as the name suggests and it comes handy at old age. Investing 50k when your earning are good is always better to have forced investment for an unseen future.
  3. Up to 60% of the accumulated money is up for withdrawal is tax-free at the age of 60.

List of Pension Fund Managers

  • HDFC Pension Management Company
  • SBI Pension Funds
  • ICICI Prudential Life Insurance Company
  • Kotak Mahindra Asset Management Company
  • LIC Pension Fund
  • UTI Retirement Solutions
  • Birla Sun Life Pension Management
The options investors have here is active or auto 
  1. Active: Here investors are choosing the % of investments into E(Equity), C(Corporate debt), G(Government Securities). Equity cannot be more than 75% of the investment.
  2. Auto: Here allocation is decided based on investors age, by default equity exposure is 50% until the age of 35 then every year 2% is reduced so as to bring to 10% at the age of 55 years. Corporate debt is 30% till the age of 35, this starts reducing by 1% to bring to 10% by the age of 55 years. Exposure in govt securities is 20% till the age of 35, this keeps increasing gradually every year. Risky investments reduce as investor age advances.

Other facts to know:

  • If investors want to withdraw before they turn 60, they have to buy 80% of the corpus into an annuity(Insurance scheme). 20% of the remaining corpus will be tax-based on the investor’s slab.
  • In the case of death, the nominee will receive all the corpus and need not buy an annuity.
  • The minimum contribution is Rs.1000 per annum to maintain the account.
  • Things to keep ready while opening NPS account Soft copy of a) PAN b) Aadhaar c) Passport size photo d) Signature on plain paper.

Investors falling under the highest tax bracket(30%) should opt for this tax-saving option in the longer run, Just to save tax do not opt any tax saving option, do understand their risk-return profile whether they suit you or not. Investments made here can be somewhere between 14-18 Lakhs if you have started late at (32 Years or earlier at 24Years). This won’t turn out to be a huge corpus but will save tax upfront and have a meaningful corpus at the age of 60.

Tax-saving Investments

Best Tax Saving Investment Ideas For 2020-2021

An investor has to plan accordingly based on the new tax regime introduced by the finance department recently for the financial year 2020-21. Recommend investors to stay with the old regime(model) of investing in tax saving instruments which will come handy in critical days, as saying goes forced saving is fruitful results at a later stage.

Under 80c we have following options for investors (Max investment for exemption 1.5 Lakhs)

a) ELSS(Equity Linked Savings Scheme): Here in this category of the mutual fund, your investment is locked-in for 3 years.

Example for SIP(Systematic Investment Plan): Investor started his SIP on 4-Jan-2015 ends on 4-Jan-2017. The first investment of 4-Jan-2015 is eligible for withdrawal on 5-Jan-2018 and the last SIP od 4-Jan-2017 is eligible for withdrawal on 5-Jan-2020.

Top funds for the financial year 2020-21

1) Axis Long Term Equity Fund(G) (Direct Fund)
Last 3 years CAGR:5.34%, absolute returns:16.90%

2) Mirae Asset Tax Saver Fund(G) (Direct Fund)
Last 3 years CAGR:3.60%, absolute returns:11.20%
Note:* Returns are post-market crash in April 2020

b) EPF(Employee Provident Fund): This is applicable for salaried professionals, who have opted for PF contribution. This gets deducted from your CTC(Cost To Company) and contributed as employee and employer.

c) HRA(House Rent Allowance): This can be availed only to salaried individuals who have an HRA component in their salary structure and are also staying in a rented house.

Note: If you are paying an annual rent of 1 Lakh and above you have to provide landlord PAN number to your employer.

d) Sukanya Samriddhi Yojana: This scheme is for girl child aged below 10 years. An account can be opened for two girl children one account per girl child and can open third if twins are involved in any of the cases.

e) LIC(Life Insurance Corporation): All kinds of premium payments towards all life insurance policies are considered under this section of 80c. Max of 10% of sum assured will be eligible for tax-deductible from April 2012. Example If the total sum assured of your policy is 2,50,000 (Two Lakh Fifty thousand). Max amount eligible for the exemption is 25000 (Twenty Five Thousand only).

f) Housing Loan Repayment Principal(Max: 1.5 Lakh): Individual repaying the principal on a home loan is eligible for this tax exemption. To claim this construction of home should be complete and if you transfer/sold the property before 5 years from the date of the year you have taken the possession, no tax benefits will be given and the year in which property is transferred/sold all the previous tax claimed amount will be taxable.

g) Fixed Deposits in Bank: Investor has to invest in tax saving fixed-deposit for 5 years to claim this tax exemption. No premature withdrawal is allowed here, although you can loans and overdraft on this investment made. Interest earned on this investment is again taxable which is not so best investment option.

h) Post Office deposits or NSC(National Saving Certificate): Again both investments in NSC and Fixed deposit in the post office are for 5 years to be eligible for tax exemption. Profit/Interest earned here will again be taxed.

i) PPF(Public Provident Fund): PPF account can be opened with any bank and the maximum amount eligible for tax exemption is (1.5 Lakhs). If your investing monthly invest before 5th to receive interest for that current month, else it will be considered next month onwards. Profit/Interest earned here compounds every year and it is completely tax-free when withdrawn. Lock-in period here is 15 years, although you can do partial withdrawal after 5 years of investment.

Always plan for your investments at the start of the financial year as this brings in discipline into your investment, above are widely used tax-saving investment options for investors. Do reply with your feedback or any suggestions.