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What investment options come with tax incentives?

Dec 19, 2018 | 2 years ago | Read Time: 4 minutes | By iKnowledge Team

If you’re an investor, you could enjoy putting your money into options that also offer you tax incentive options.

It is rare to find someone who must have not heard of billionaire Warren Buffet, a veteran whose investment advice giving tips on investment. There are many who want to emulate his success story and rightly so. A person’s investment portfolio must have a good mix of conservative, balanced and aggressive options that give high returns, but also ensure great benefits. In the words of Buffet, ‘Do not put all your eggs in the same basket’.

As an investor, one must go for options that not only help you to save tax, but at the same time, generate tax-free income. While weighing the pros and cons, several factors like safety, liquidity and returns are considered. If the income earned is taxable, there is less scope to make money in the long run, since a major chunk of it will go into taxes.

Though there are certain options like National Savings Certificate (NSC) and Senior Citizens Savings Scheme (SCSS), the interest amount gets added to your income and is liable to be entirely taxed. These options help you save tax in the current year, but it turns out to be a tax liability till the end of the tenure.

But for most people earning a salary or who run their own business, it is best to go for options that come with E-E-E status, which means exempt – exempt – exempt status on the income earned. The principal that one invests gets deducted under Section 80C of the Income Tax Act, 1961 and the income in all is exempt under Section 10.

Here’s a look at some investment options that come with tax incentives:

1)Equity-Linked Saving Schemes

Equity-linked saving schemes are those mutual funds that can be identified in two ways. Firstly, the amount you invest is eligible for a tax benefit under Section 80C of the Income Tax Act, 1961, up to a limit of Rs 1.5 lakh annually. The other is that the amount you put in has a lock-in period of three years.

Most big companies offer this option and most people go for it because of the tax saving aspect, which is different from other schemes. The returns in these funds are not fixed at all and are completely dependent on the equity markets.

One has the flexibility to choose two options, either dividend or growth. The first one makes sense for those who have a steady income, while the latter is better for someone who wants to save for the long run. If you go for the dividend option, it is declared out of profits generated by company while part of the Mutual Fund. So, receiving the dividend is more like redemption of units. The growth option is better to avail better tax benefits.

2)Public Provident Fund

Since time immemorial, Public Provident Fund (PPF), 1968 has been the preferred saving scheme for several investors and still finds favour among them. This is primarily because the principal and the interest earned have a sovereign guarantee and of course, the returns are exempt from tax.

Currently, PPF offers 7.6% annually, so for someone who must pay 30.9% tax under the highest income slab, it turns out to be nearly 11.04% taxable return. This is one of the rare tax-saving instruments that offers such great pre-tax return! The PPF contributions you make annually qualify for tax deductions under Section 80C of the Income Tax Act, 1961.

One can either open a PPF account in his name or the name of a minor who he is the guardian of. The minimum amount to be kept in the account is Rs 500, while the maximum that can be deposited in a year is Rs 1.5 lakh.

The lock-in period for a PPF account is 15 years, which can then be extended in a block of five years. You can either open such a type of account in a designated post office or bank branch. Some private banks also offer this facility today.

3)Unit-Linked Insurance Plan

Unit-Linked Insurance Plan or ULIP serves the purpose of both insurance and investment. It not only provides financial protection, but also helps channel savings into a range of market-linked assets for savings in the long term.

Most ULIPs offer a myriad of fund options with allocation between equity and debt. This type of scheme can have a duration of 15 to 20 years, though the lock-in period is 5 years. Besides, the fund value on exiting the policy (which is permitted after five years) is exempt from tax.

Trusted insurance providers like Aegon Life provide plans such as Aegon Life’s iMaximize insurance plan ensures you maximise your returns at the best possible premium costs. It also has no premium allocation charges, allowing you to keep more money for investments. In case the policy holder dies, there will also be a death cover provided, in which the cover amount or fund value will be paid, whichever is higher. Also, after   five years of the policy, they can partially withdraw some money annually, which is equivalent to 20% of your fund value as fixed at the beginning of your policy. This plan is also a great way to prepare for your child’s safety in your absence.

ULIPs provide tax benefits both at the time of investment as well as maturity. The money invested in ULIP qualifies as deduction under Section 80C or 80CCC of the Income Tax Act, 1961.

4)National Pension Scheme

The National Saving Scheme or NPS is a voluntary pension offered by the government of India. Under the National Pension Scheme, tax-saving can be availed under three categories. Firstly, the money that you invest up to Rs 1.5 lakh can be qualified as deduction under Section 80C. Additionally, one is also eligible to claim a maximum deduction of Rs 50,000 under Section 80CCD(1b). Lastly, if a part of your basic salary (10%) goes as part of the NPS, then the amount is non-taxable.

These options will not help you save tax, but also generate tax-free income. After all, a penny saved is a penny earned!

II/Dec 2018/4690


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