Through taxation, we can lose a significant portion of gained money as returns on investments are considered as income and are taxable. Yet the Indian tax regime does not deduct taxes under one single mode.
It allows relaxation for different investment modes. If investors wisely choose their investment options and spread out their monies, then they can save significantly on taxes.
Criteria for Selection of Investment Mode
On what basis should investors decide to invest in a particular instrument? As investors, we are concerned about the returns on investment, lock in period, savings on tax and ease of investment, risk, growth and security.
Insurance and Investment
Insurance products are generally not considered as investment products as most insurance products do not provide any returns at the end of the policy tenure. Insurance products generally provide cover against mentioned conditions like death, accident, illness, hospitalization, medical emergencies.
Unit Linked Insurance Plans (ULIPS)
Yet insurers are nowadays making their insurance product offers attractive by linking them with a return based investment component. The returns earned on ULIPS are non taxable and is at present around 10.5 to 11 %. Investment components comprise equity, debt funds, bonds, government securities. The investment component can be high growth, high stability or balanced fund.
Health insurance is not an investment but health cover against sudden illnesses and hospitalization. Though these are not generally investment products, yet these offer substantial tax savings as the section 80D of the income tax law allows for tax exemption on health insurance up to Rs 25,000 annually for individual and family and another Rs 30,000 annually if senior citizens are also covered.
Pure Investment Options
Pure investment options can be Fixed deposits or Term deposits in banks and non-banking financial institutions or equity based investment. Equity based investment is high on risk and volatility but also can provide high returns. Fixed deposits are low on returns, but returns are stable and risk-free.
The returns at present on fixed deposits are quite low and are hovering below 7%. Fixed deposits can have tenure ranging from one year to five years. Short term deposits generally offer more interest.
Though the fixed deposits have a particular tenure, they can be broken before the end of the tenure for which the bank or financial institution may deduct 1% from the rate of return. Thanks to internet banking, fixing money has now become even simpler and can be achieved within few clicks.
Equity Linked Savings Scheme (ELSS)
Under the ELSS schemes, the financial institutions create a portfolio for the investor and invest the fund of the investor in multiple investment instruments. The portfolio is closely monitored by fund administrators to maximize gains and minimize risks. The portfolio can comprise of large, mid and low cap equities.
Investments in pension funds are generally secure, and returns are risk-free but lock in periods are long, usually until retirement age. The fund cannot be withdrawn under general circumstances, but full or partial exemptions are allowed in case of critical circumstances like employment loss, accident, death or other debilitating circumstances.
Senior Citizen Schemes
Senior Citizen Schemes are available to senior citizens above the age of 58 or 60 years, and its purpose is to build a wealth corpus to take care of the needs of the senior citizen investor. The lock in period is five years and can be extended for another three years. Senior Citizen schemes are exempt from taxes and offer stable, and secure returns of around 8.5% p.a and the interest is payable quarterly.
Schemes for Girl Child
The Sukanya Samriddhi scheme can be taken up for the girl child below ten years. The scheme has a lock in period till the girl completes 21 years of age. The scheme can be taken up for one or two girl child and at least Rs 1000 per year and not more than Rs 1.5 lakh per year can be invested for the individual as well as combined schemes. The scheme is exempt from taxes and at present is offering returns around 8.5%.
Provident Fund Schemes
The VPF and PPF schemes offer at present returns around 8.5 to 8.7% and provides tax exemptions under section 80 C till Rs 1.5 lakh cap. The fund is totally debt based and as such is highly secure. The scheme is a good option for salaried people or people with a regular monthly income. The lock in period is until retirement, but in case of dire eventualities like employment discontinuation, the fund may be withdrawn prematurely.
(Views expressed in this article are a personal opinion of Naval Goel, CEO & Founder of PolicyX.com)