When the pandemic first reached India in 2020 and the countrywide lockdown was announced in March, the CBDT had extended the 31 March deadline for tax-saving investment till 31 July. The arrival of the Omicron variant has once again set the alarm bells ringing, but taxpayers should not expect any leniency in the deadline this year. As they rush to complete their tax planning for the year, we have put together all the information they need. Like in the past, we have assessed 10 tax-saving instruments on eight key parameters— returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income. Each parameter is given equal weightage and the composite scores of the various tax-saving options determine their place in the ranking.
The ranking is largely unchanged for the past 2-3 years. ELSS funds are still at No. 1 position, followed closely by the NPS and small saving schemes. Though the tax net has ensnared many investment options, the tax-free Ulips continue to score low due to their inflexibility. And traditional life insurance policies remain the worst way to save tax. They give very low returns and the high premiums prevent the policyholder from investing in other options. That’s why life insurance is at the bottom of the heap this year as well.
For past five years: These equity funds have given high returns and have the shortest lock-in among all tax savers. But investing a large amount at one go can be risky.
Equity markets are looking precarious and many analysts believe a correction is round the corner. Also, long-term capital gains beyond Rs 1 lakh from equity funds are now taxable. Yet, ELSS funds have topped the list of best tax savers this year as well. That’s because these score handsomely on other parameters. These have the potential to give high returns, there is transparency about where these invest and the costs are very low. Besides, the lock-in period is very short and investors have the ..
While these are the positive aspects, ELSS funds can be risky due to the volatility in the stock markets. Volatility suits long-term investors who take the SIP route. But the SIP window has closed for taxpayers who have to show proof of Sec 80C tax-saving investments in a few days. So, our advice is not to put a large sum into ELSS funds at one go but stagger the purchases over 2-3 tranches before the 31 March deadline.
Investing in ELSS is very easy if you are already KYC compliant. It can be done online in a matter of minutes directly through a fund house or an investing portal. Keep in mind that some ELSS funds allocate more to small- and mid-cap stocks, while others stick with stable large-cap stocks. Choose a fund that suits your risk profile.
For past five years: Has a very long lock in period, but additional deduction it offers is very beneficial for high income earners.
The NPS has become more investor friendly over the past few years. The entire 60% of the corpus withdrawn at the time of retirement is tax free. Younger investors can now allocate up to 75% to equities. Older investors can remain invested in the scheme even after they retire till the age of 70 and stagger their withdrawals What’s more, active investors may soon be allowed to change their allocation and pension fund manager up to four times in a year.
At the same time, investors should not expect very high returns from NPS in the short to medium term. Bond yields are beginning to rise and could shoot up if there is a rate hike. In such a situation, NPS investments may not deliver very attractive returns.
But the tax benefits of NPS are unparalleled. The scheme can help save tax under three different sections. Firstly, contributions of up to Rs 1.5 lakh can be claimed as a deduction under the overall Sec 80C. Secondly, there is an additional deduction of up to Rs 50,000 under Sec 80CCD(1b). Thirdly, if the employer puts up to 10% of the basic salary of the individual in the NPS, that amount will not be taxable.
For past five years: The tax on long-term gains from equity funds has made this tax free haven attractive. You don’t pay tax but are stuck with same fund.
Ulips have a distinct tax advantage over ELSS funds. They are also more flexible because investors can switch from equity to debt (or vice versa) depending on their reading of the market. In fact, this feature of Ulips must have been used extensively by policyholders when markets crashed in March 2020. What’s more, there are no tax implications of the gains made from such switching because the income from Ulips is tax free. This makes Ulips an effective rebalancing tool and a one-stop-shop for all financial needs.
But there are some negative points as well. A Ulip may not be able to give you the life cover you actually need. Also, it is a long-term investment and you must continue with the policy for the full term or risk losing liquidity. Ulips also continue to be mis-sold by wealth managers, especially in the last quarter of the year when the 31 March deadline is closing in.
But there are some negative points as well. A Ulip may not be able to give you the life cover you actually need. Also, it is a long-term investment and you must continue with the policy for the full term or risk losing liquidity. Ulips also continue to be mis-sold by wealth managers, especially in the last quarter of the year when the 31 March deadline is closing in.
Our rating: 4 starsInterest rate: 7.1% (for Oct-Dec 2021)For past five years: Tax-free interest makes this more attractive than bank deposits, but watch out for the long lock-in period.
This popular tax-saving option scores high on safety, flexibility and taxability. But the interest rate is low at 7.1%. While bond yields are set to rise, this may not lead to higher rates for small savings schemes. Experts say that the interest offered on small savings schemes is artificially high and should be lower by at least 30-50 basis points. Last year, the government had cut small savings interest rates but had to roll back the decision following a backlash from investors.
The tax-free nature of the PPF makes it better than fixed deposits. It is an investment in which you can’t ever go wrong. An account can be opened in a Post Office branch or designated branches of PSU banks. Some private banks also offer the facility to invest in the PPF. The tenure of the scheme is 15 years from the first investment. On maturity, this can be extended in blocks of five years.
- Senior Citizens’ Saving Scheme
Our ratings: 3 starsInterest rate: 7.4% (Oct-Dec 2021)Best way to save tax for senior citizens. Exemption for Rs 50,000 interest makes it more attractive.
The Senior Citizens’ Saving Scheme (SCSS) is the best investment option for those above 60, especially after the additional tax exemption for interest up to Rs 50,000. An account can be opened in a Post Office or at designated branches of banks. It is better to open an account with a bank because operating it will be less cumbersome.
The scheme offers a higher return than the PPF. Banks also offer higher rates to senior citizens for five-year tax-saving fixed deposits, but they cannot match the SCSS. However, the eligibility is restricted to those above 60 years. Also, there is a Rs 15 lakh overall investment limit per individual. These rules have narrowed down the eligibility of the scheme and brought down its overall score in our ranking. In some cases, where the investor has opted for voluntary retirement and has not taken up another job, the minimum age is relaxed to 58 years. There is also no age bar for defence personnel. They can invest in the scheme even before 60 as long as they satisfy the other requirements.
|
