tax saving oprions

8/20/2019 Tax Saving Oprions

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11 Tax-Saving Options That Save Tax

And Grow Your Wealth

“In this world nothing can be said to be certain, except death and taxes”- Benjamin

Franklin.

If you are reading this, you are likely to be someone whose income exceeds the

threshold of Rs 2.5 lakhs for paying taxes. There are some legitimate ways of saving

taxes and the good thing is that most of them also help you grow your wealth. These

options usually have a lock in period and vary in the nature and amount of return they

provide. You must also remember that each of these alternatives also serve specific

purposes and tax saving is not the purpose but an ancillary benefit of that.

Comparing the different options

Summary: The best way to look at the various 80C investment options is to see what is

pre-determined and what is optional. EPF, Home Loan repayment and Tuition Fees are

pre-determined. Add them up and see how much of your 1.5 lakh limit is utilised. Use

the below table to decide where you want to invest the rest.

InvestmentLock-in

Period

Pre-Tax

ReturnsTax Applicable

ELSS 3 Years 14-16% No tax

5 Year Bank

FD5 Years 9.50% Interest is taxable

PPF 15 Years 8.50% No tax

NSC 5 or 10 Years 8.50% Interest is taxable

Life Insurance 5 Years 0-6% No tax


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Based on your risk appetite and expected returns, you can choose a product that’s best

suited for your situation.

What does Scripbox recommend?

• ELSS Mutual Funds – For people who want superior returns and also have higher risk appetite

• PPF – For people who want returns at par with inflation and have very low risk appetite

For a more detailed understanding of the most

popular tax saving investment options, please read our detailed review below.

ELSS Tax Saving Mutual Funds

ELSS or Equity Linked Saving Schemes, are a kind of equity linked mutual funds. As

they invest in equity or stocks, ELSS funds have the ability to deliver superior returns –

14-16% over the long term. That’s a full 6-8% above inflation.This return is not

guaranteed though but historical evidence suggest that these returns are achievable

over the long term.

ELSS funds have a lock in period of only 3 years – the lowest amongst the optionsavailable. The return from ELSS funds is also tax free.

You can investup toRs 150,000 in ELSS funds either as a lump sum or on a monthly

basis (SIP) thereby spreading your investments over the course of the year. The latter

also helps in reducing volatility that’s typical of equity linked products.

You can invest in these mutual funds through an advisor or an online portal like

Scripbox.

Public Provident Fund

PPF is a good option if you are looking for an option with certain returns.

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YourPPF investments earns interest at a rate announced every year – currently 8.7%.

PPF return is therefore mostly at par with inflation. However, it is tax-free and you can

do a lump sum or small regular investments.

The duration of a PPF account is 15 years which is extendable by 5 years at a time. You

cannot withdraw money from your PPF account except under certain conditions but not

before 5 years.

You can invest in PPF through a bank or Post Office. Ability to invest online is limited.

5 Year Bank FDs

This is a variant of the regular Bank FD with a 5 year lock in. They offer slightly higher

interest rates compared to normal FDs (0.25-0.5% higher) but does not offer liquidity

option- even premature withdrawal with penalty is not possible.

The amount you can invest is limited to Rs 1,50,000. The interest you earn on your 5

year bank FD is fully-taxable and you will have to pay taxes on a yearly basis for the

interest you earn for that period. TDS typically collected by banks is only 10% (20% in

case you have not submitted your PAN) and if you happen to be in the 20 or 30% tax

bracket, you need to pay the remaining interest while filing your IT returns.

Post-tax, 5 year bank FDs are not particularly attractive- especially for people in the 20

and 30% tax brackets since the post-tax returns (6-7%) are typically lower than other tax

saving investment options.

National Savings Certificate (NSC)

NSC interest rates are fixed in April every year. The current rate is 8.5% for 5 year lock-

in NSCs, and 8.8% for 10 year lock-in NSCs.

The interest accumulated is fully taxable. However, one key difference here is that the

interest amount is not paid out to the investor. Instead, it’s re-invested in NSC and

therefore can be considered as your investment in NSC for the subsequent year.

Needless to say, this is complex.


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Investments up toRs 150,000 are eligible. You can invest in NSC via your local post

office.

Life InsurancePremium

This was almost the default tax saving option for years However, over the last few years,

most informed investors have learnt the perils of choosing this option

There are 2 kinds of Life Insurance Policies:

• Pure risk also called term life which ensure a risk to the life of the insured

• Risk+ investment: which pay you back money over time

While pure risk life insurance is something everyone with a dependant must have, it’s

not an investment. Life insurance is an expense- something you pay to ensure that your

dependents are not left stranded should something unfortunate happen to you. Term life

insurance is cheap and for a sum of about Rs 10000, you can purchase a cover of Rs 1

Cr

The returns from and costs of investment oriented insurance policies are not transparent

and usually not attractive. We won’t go into length on this topic but suffice to say that

you should not consider Life Insurance as a tax saving investment option.

National Pension Scheme

National Pension Scheme is a lot like investing in mutual funds with its Safe, moderate

and Risky options. The returns are not guaranteed.

You cannot withdraw until 60 and the corpus amount must necessarily be invested in an

Annuity. The withdrawals are also taxable.

Contributions up toRs 150,000 are eligible for deduction under Sec 80C. You can invest

via the specified list of NPS fund managers with points of presence operated through

banks.


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However, given the restrictions that come with NPS, it’s not a recommended option.

Pension Funds

Pension funds are designed to provide you an income stream post retirement. Theycome in two flavours: Deferred Annuity and Immediate Annuity.

For deferred annuity plan, you invest annually until your retirement. Once you reach your

retirement, you have can withdraw up to 60% of your accumulated corpus and have to

re-invest the remaining in an annuity fund which will give you a monthly pension.

When it comes to immediate annuity plans, you invest a bulk amount one-time and get

monthly pension from the next month itself. You would typically use these to invest your

retirement corpus.

Pension funds are not very popular because of the sub-par returns (around 6%) that

they give and the restriction they come with. That’s less than India’s inflation rate and

not even half of what ELSS funds provide in the long run.

Pension funds are offered by a number of providers. Contributions up toRs 150,000 are

eligible for deduction.

Senior citizens savings scheme

The senior citizens savings scheme is a product aimed at senior citizens to save tax. It

can only be opened by people who are above 60 years old.

There is a maximum cap of 15 lakhs and a lock-in period of 5 years. You may withdraw

the money before subject to penalty as follows

• More than 1 year but less than 2 years – 1.5% of deposit amount

• More than 1 year but before maturity – 1 % of deposit amount

This scheme is offered via the post office. Investments up toRs 150,000 are eligible.

EPF (Employee Provident Fund)


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For salaried employees, this is not necessarily an optional thing. You will need to follow

your company’s policy with some leeway available. However, a lot of people forget that

the amount contributed to EPF is also eligible for 80C deduction.

EPF is typically deducted from your salary every month and it includes 12% of your

Basic salary + DA up to a maximum limit of INR 6500 per month (inclusive of the

optional matching employer contribution).

You can withdraw EPF when you change jobs. However, your accrued amount will be

taxed as other income. If you withdraw EPF after 5 years, you do not attract any tax.

Withdrawal after 5 years is based on qualifying criteria.

The interest rate varies every year (for e.g. interest rate in 2010-11, was 9.5%, while inthe previous five years it was 8.5%). For 2014-15, the interest rate is fixed at 8.5%.

Other Tax Saving Investments & Expenses

Apart from voluntary contributions we make, there might be some forced savings/

expenses that already qualify for tax saving.

Tuition Fees for Children:Tuition fees for up to 2 children are covered under section

80C. Please note that it convers tuition fees only and not development fees or

donations.

Home Loan Principal Repayment:You are eligible for tax exemption for the repayment

you make towards yourhome loan principal. Do note that the interest component is not

eligible for tax benefits.

The scripbox recommendedportfolio of tax saving ELSS funds will help you invest in the

ELSS funds with the best prospects and also provide you the convenience of onlineinvesting and tracking.

Please note that this article does not attempt to be a comprehensive tax saving guide,

only a listing of the most common alternatives. Other alternatives include Infrastructure

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bonds, PO deposits etc. It’s also recommended that you get proper tax advice for your

situation.

4 Lesser Known Ways To Save Tax by Scripbox 7 Comments ★ Personal Finance

Gain from Permitted Tax Strategies not Evasive Loopholes

Every year, when the time comes to file taxes, it’s an itchy interlude, when most of us are filled with anxiety about the

deductions that are going to burn a hole in our pockets.

Here are five subtly obvious ways you can save tax.

#1: Gain from capital losses by balancing it off

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Did you know you could balance short term losses against long term capital gains? Short term capital losses such as

that incurred from investing in stocks can be set against long term capital gains like that gained from debt funds or

sale property.

For instance, you’ve paid off the home loan and sold the property for a profit of Rs. 40 lakh. At 25%, the amount of tax

payable is Rs 10 lakh. In the same year, however, if you have sold stocks at a short term loss of Rs. 4 lakh, then your

taxable amount will be Rs. 36 lakh.

Proof Required – Ensure you keep the statement of your trading account, including the details of transactions for

which you have incurred losses.

#2: Learn More to Save on Educational Expenses

Increasing cost of education is a major concern for parents. In the case of education, the taxman is relatively

favorable.

Under Section 80C and 80E, interest on educational loans for children as well as spouses (excluding relatives and

siblings) is deductible from taxable income for the first eight years.

Proof Required – For claims on interest paid on education loans, you need to present your loan account statement

as proof.

#3: Lighten the weight of medical expenses on illness of dependants

The taxman understands that in circumstances where a dependent is chronically ill, medical expenses can weigh

down taxpayers. Therefore, under Section 80DDB, an annual deduction of INR 40,000 or INR 60,000 for senior

citizen dependents can be claimed.

Deductions can be claimed on onlycertain diseases, some of which include, advanced stage of AIDS, hematological

disorders such as hemophilia, neurological diseases such as Parkinson’s, dementia, chorea, and chronic kidney

failure.

To be eligible for a claim, dependents (parents, children, spouses and siblings) should not have claimed for deduction

separately.

Proof Required – For claims on medical expenses on illness of dependants, you need a medical certificate and

details of the illness from a certified medical professional in a government hospital.

#4: Politicians are not the only ones to gain – Benefit from deduction on political contributions and charitable

donations

Being socially responsible and politically inclined seems to be the current trend. Whether you contribute to a

recognized political party, volunteer to donate money to a NGO or charitable organization, you are eligible for a tax

deduction.

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Under Section 80GGC (80GGB for corporates), donations to registered political parties (excluding contributions to

individual) or electoral trusts can be entitled for a deduction. A fascinating point to note is that there is no upper limit

on the amount that can be claimed as a deduction.

Under Section 80G, 100% or 50% of your donation to a charitable organization and up to 10% of your income is

entitled for deduction.

Proof Required – For claims on contributions to political parties, you need a stamped receipt from the party or trust.

For claims on donations made to charitable organizations, a tax exemption certificate or receipt is required.

Remember: It’s not about avoiding taxes. It’s all about reducing your tax liability

Comparing Popular 80C Investment

Options To Save Income Tax by Scripbox 13 Comments ★ Investment Strategy, Personal Finance

There are various options to save tax under section 80C of the Income Tax Act. But,one of them is better than the

others.

Comparing some of the most popular 80C investment options.

What are ELSS funds?

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They are open-ended equity mutual funds that are eligible for tax deductions under Section 80C of the Indian Income

Tax Act. They have the dual advantage of growing your wealth in addition to saving tax.

ELSS funds provide the best combination of

• Potential for Long term inflation beating returns (14-16%)

• Lowest lock in period (only 3 years) among all 80C investments and

• Zero tax on your income from investment

Like all equity funds, the returns on ELSS funds are not guaranteed but this is the historical average for long

term investments in ELSS funds.

How to invest in ELSS funds?

At Scripbox, using our scientific algorithm, we carefully select ELSS funds with the best long term prospects for you.

How will my money grow by investing in ELSS funds?

Careful ELSS fund selection can help you grow your wealth quickly compared to other 80C investment options.

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ELSS funds potentially give you inflation beating returns (14-16% historical long term average), which help you grow

your wealth in addition to saving tax.


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Consider The Tax Bite When You Invest

by Ravishankar 0 Comments ★ Investment Strategy, Personal Finance, Stock market

Expected return of equity investments is higher than fixed income, but taxed far less

We keep hearing the refrain that equities in the last few years haven’t

even kept up with FDs. There are two fallacies here:

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1. Equity return over the last 30 years has been about 16%, despite a flat market for the past 5 years. Well managed

mutual funds have delivered even better.

2. Equity and debt are taxed differently and that makes a big difference. There is no income tax on equity held for a

year or longer whereas debt attracts income tax at normal rates. On a post tax basis the FD return (or any debt

investment for that matter) is lower by 10-30% depending on your tax bracket.

So here’s how the two alternatives measure up historically :

Equity: 16% annualised return with no income tax

FD: 9% annual return, fully taxed

This is not a pitch for investing in equity. Understanding the tax impact for the choice of investment is important in

your decision.

Key Personal Financial Terms Everyone Should Know

by Scripbox 0 Comments ★ Personal Finance

It does not matter whether you hire an accountant or an advisor to handle

your finances, understanding basic financial concepts will only help you manage your investments better.

Below is a glossary that describes the frequently used financial jargons.

#1: Inflation

Defined as a sustained increase in the general level of prices for goods and services, inflation reflects a reduction in

the purchasing power per unit of money. The value of money is observed in terms of purchasing power, so the higher

the rate of inflation, the lower is your purchasing power.

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While it influences the economy it also affects the investors. It tells investors exactly how much of a return their

investments need to make for them to maintain their standard of living. For example – if a certain stock returned 4%

and inflation was 5%, then the real return on investment would be minus 1% (5%-4%). In India the inflation rate

averaged 8.98 percent from 2012 until 2014.

Compounding

Generating earnings from previous earnings is referred to as compounding. In Scripbox terms, making your money

work hard.

For example, let’s say you invested INR 10,000 and it earned an interest if INR 1000 in the first year. Now, for the

second year, if you don’t make any more investments and assuming the interest rate remains the same at 10%, you

will generate an interest amount of INR 1100 for second year. The interest earned in the first year, generated

additional interest in the second year. This way, your money keeps on growing until withdrawn. This is called

compounding. It is one of the fundamental ways to build wealth.

Related reading

Why I Will Always Have Less Money Than Abhay!

Interest Rate (Floating, Fixed, and Reducing)

An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from lenders.

A fixed interest rate stays constant throughout the duration of the loan however.

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A floating interest rate is based on a base rate which is controlled by the RBI and can change over the duration of the

loan. Floating interest rates can affect your interest payable and could increase/decrease your monthly instalment

amount.

A reducing or diminishing interest rate is calculated on the outstanding loan balance every month. Interest Payable

per Installment = Interest Rate per Installment * Remaining Loan Amount.

Time value of money

Time value of money is a concept based on the idea that the value of money available at the present time is worth

more than the same amount in the future.

For example, INR 100 invested today for one year at a 5% interest rate will be worth INR 105 in the next year,

therefore, INR 100 paid now and INR 105 paid one year later have exactly the same value.

Related Reading

The Riskiness Of Cash

Market volatility

Volatility refers to the amount of uncertainty or fluctuation in the value of an investment. In other words, volatility refers

to the amount of uncertainty or risk about the size of changes in a security’s value.

It is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by

calculating the standard deviation of the annualized returns over a given period of time.

Asset allocation

It is an investment strategy which aims to balance risk and reward. In other words, it is the process of deciding the

proportion of your portfolio dedicated to various assets based on your goals, risk tolerance, and time sphere.

The three major asset classes include equity, real estate, and fixed income. Each of these classes reacts differently to

different economic conditions. Hence it is wise to diversify your portfolio and spread your investments across multiple

asset classes.

Recommended related reading

• What Is The Right Asset Allocation?

• Risk Assessment And Asset Allocation

Net worth

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The difference between your assets and liabilities is referred to as net worth. You can calculate your overall financial

health by adding up all of the money and investments and subtracting all the debt from the grand total. The resulting

amount is your net worth.

Credit Score

Credit score is a numeric representation of a person’s credit files and defines a person’s creditworthiness. It is used

by lenders to assess whether the person will be able to clear off his debts.

Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The score

ranges from 300 to 850 – the higher the number, the more creditworthy the person is deemed to be.

Capital gains

The increase in the value of an asset or investment, like a stock or real estate, above its original purchase price is

called a capital gain.

Rebalancing

Rebalancing involves buying or selling assets periodically to maintain your desired asset allocation.

For example, if your target allocation is 60% stocks, 20% bonds and 20% cash, and the stock market has performed

particularly well over the past year, your allocation may now have shifted to 70% stocks, 10% bonds and 20% cash.

To rebalance your portfolio, you could sell some of your stocks and reinvest the amount in bonds and rebalance your

portfolio.

Related Reading

Rebalancing – The Secret to Long Term Investing Success with Scripbox

Stocks

Stocks are a type of investment or security which gives you part-ownership in a company. Also referred to as shares

or equity, stocks give you a claim on part of the company’s assets and earnings. The more stocks you own, the higher

is your ownership stake in the company.

There are two types of stocks, common and preferred. A common stockholder can vote at shareholders meetings andreceive dividends. Preferred stockholders have a higher claim on assets and earnings than owners of common stock

but do not have any voting rights.

Bonds

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A bond is a debt investment or a loan issued to a corporate or governmental entity for the purpose of raising capital. A

bond is a promise to repay the principal along with the fixed interest for a defined period of time. Some bonds do not

pay interest, but all bonds require a repayment of principal.

Related Reading

Why Debt Mutual Funds Are An Excellent Alternative To Fixed Deposits?

Equity

An equity investment generally refers to the buying and holding of shares of stock in anticipation of income from

dividends and capital gains. However, in the context of real estate, it is the difference between the current market

value of the property and the amount the owner still owes on the mortgage. In other words, it is the difference

between the current value of the property and the amount that the owner owes against it.

Related Reading

Why Invest in Equities?

Term Insurance

Term insurance is a traditional form of life insurance which offers life coverage for a specified duration of time or a

specified “term” of years. Term insurance provides only insurance cover and does not offer money back on maturity.

Available for a range of 10-30 years, term insurance is the cheapest and most recommended type of life insurance

policy.

Premium for Life Insurance

A premium is an amount to be paid periodically for a contract of insurance. The premium amount is calculated based

on several parameters like age, type of employment, medical condition of the insured person, etc. The premium

amount can be paid in monthly, quarterly or annually for a defined period of time.
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