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Top 5 Tax Free Investment Options in India
Two types of questions are frequently asked by taxpayers, first one is what are the best tax-saving investments and second what are the best tax free investments options in India are? Both of them sound somehow similar but there is subtle difference between both of them. Tax-Savings Investments refers to the investments which does not offer you full deduction of the invested amount and also the returns may or may not be taxable while on the other hand tax free investments refers to the investments which provides full deduction of the invested amount as well as the returns on the investments are also tax free. In this article we are going to see only tax free investment options in India.
1. Public Provident Fund
Public Provident Fund (PPF) is a Government backed savings and retirement planning investment scheme.
One can investment maximum up to Rs.1.50 lakhs and minimum investment is Rs.500 per annum. The whole investment can be claimed as deduction under section 80C.
The money gets locked-in for 15 years. However partial withdrawal is permitted but only after the end of 6th year.
The Interest Rate on PPF is linked to Government Securities which gets revised every quarter i.e. for the quarter July to September, the rate is declared by 15th June and for the next quarter i.e. October to December, the rate is declared by 15th August. Interest Rate for running quarter April 2016 to June 2016 is 8.10% p.a.
The interest is compounded annually and the monthly interest is calculated only on the balance standing on or before 5th of the month. Suppose if you have PPF balance of Rs.1 lakh on 1st April and deposited Rs.25,000 on 4th April than for the month of April you would get interest on Rs.1.25 lakhs but if you deposit Rs.25,000 after 5th April, say on 7th April than you would get interest on Rs.1 lakh for the month of April. The deposited Rs.25,000 would fetch interest on the next month i.e. in May.
The Interest earned on PPF is tax free under section 10(D).
2. Equity Linked Savings Scheme
Equity Linked Savings Scheme is the only tax free investment options which channelize retail savings in equity market by investing in Equity Oriented Mutual Funds.
ElSS Tax Savings Mutual Funds comes with a shortest lock-in period of 3 years amongst all investment options under section 80C. (PPF lock-in period 15 years, Tax Savings Bank FD is 5 years, Sukanya Samridhhi Account Scheme is 8 years, National Savings Certificate is 5 years?etc.)
All phases of ELSS funds aka Contribution-Accumulation-Withdrawal phase are tax free. Invested amount is eligible for deduction u/s 80C. The returns generated get accumulated over the lock-in period and since the holding period of funds is of 3 years, at the time of withdrawal capital gains becomes tax free.
You can opt for either dividend payout option or growth option (dividend reinvestment option is discontinued for ELSS Funds). If you opt for dividend payout option than Dividend declared is also tax free in the hands of the investors/unit-holders.
The minimum investment to start ELSS is Rs.500 per year while there is no upper limit but to get benefit of deduction u/s 80C one may invest maximum of Rs.1.50 lakh.
The only drawback of investing in ELSS tax saving mutual funds is that returns are not guaranteed however, mutual funds tends to give better result than conventional investment plans in longer tenure.
3. Sukanya Samriddhi Account Scheme
Government had started a savings scheme only for girl child up to the age of 10 years (completed) under the Campaign ?Beti Bachao Beti Padhao?. The objectives behind this scheme are to ensure survival and protection of the girl child and to enhance?the literacy percentage?of girls. The scheme Sukanya Samriddhi Account Scheme was initiated in October 2014 in 100 districts which is now spread all over the country.
Parents or legal guardian of the girl child can open account for the child up to the age of 10 years for maximum of 2 girl child including adopted daughter in a post office or an authorised bank branch. To open the account birth certificate of the girl is needed along with the identity proof and address proof of the parents/legal guardian.
As per the scheme, minimum of Rs.1,000 is required to be deposited each year with a maximum permissible limit of Rs.1.50 lakh each year. The deposits are to be made for 14 years and then for 7 years the accumulated amount will keep earning interest as a fixed deposit till the maturity which 21 years from the date of opening of account or at the event of her marriage, whichever is earlier. Please note that the girl attaining the age of 21 years has no relevance to the maturity of the account.
The interest rate on Sukanya Samriddhi Account is linked to G-Sec and declared every quarter and compounded annually similar to PPF. Currently for the April, 2016 to June 2016, SSA fetches interest at the rate of 8.60% p.a. which is due to revise on 15th June for next quarter.
Partial withdrawal of 50% is allowed from SSA but only for the purpose of higher education of the Girl Child once she attains the age of 18 years. Premature closure of the account is also permissible if the girl completed the age of 18 years but gets married before attaining the age of 18 years.
Only girl child can request for the withdrawal from the account even partially or fully (at maturity) by filing withdrawal receipt along with the pass book. Parents or Legal Guardian has no control over the withdrawal of the account after the girl completed the age of 18 years.
Invested amount can be claimed as deduction u/s 80C and the withdrawal/maturity proceeds is fully tax free in the hands of the girl.
4. Employees Provident Fund/Voluntary Provident Fund
Employees Provident Fund (EPF) is widely known investment cum savings scheme for post-retirement life of salaried individual. The basic need for having EPF account is that taxpayer should be salaried individual and drawing salary of Rs.15,000 or less. Employee drawing salary more than Rs.15,000 is optional to have EPF account but currently EPF is the best retirement planning tool and one must not make a mistake to not have it. EPF is opened through your employer at the regional Employees Provident Fund Organisation (EPFO) office.
The contribution towards EPF is fixed at 12% of the basic salary and the equivalent amount is contributed by the employer also. EPF earns interest at 8.70% p.a. for current fiscal year 2015-16 and is revised every year.
EPF account is matured earlier of the retirement of the employee or the employee opting out of the scheme. However, Loans and withdrawals are allowed for several reasons such as for marriage, child education, purchase or construction of residential house or for any medical emergencies. The withdrawals may be made after fulfilling certain conditions.
The contributed amount is deductible u/s 80C and the loans/withdrawals are also tax?free subject to minimum serving of 5 years continuously else premature withdrawal is subject to tax. The maturity proceeds are also tax free which makes EPF an EEE scheme.
Voluntary Provident Fund is an extension of EPF account and any contribution made by the employee over and above 12% towards his/her EPF account is treated as VPF. However, employer is not forced to contribute the equal amount of this VPF. Only employee can contribute and can claim tax deduction u/s 80C. VPF carries same interest rate as of EPF and withdrawals can be made similar to EPF. The returns of VPF are also tax free as of EPF. The only drawback of VPF is if the interest rate exceeds?9.50% p.a. than the interest earned becomes taxable.
5. Life and Health Insurance aka Mediclaim
Life Insurance is a vital part of financial planning. It not only gives your family a protection in an unfortunate event but if you opt for money back plans or endowment policy, you will get maturity proceeds once the policy term finishes. The premium paid towards the policy via any mode except cash, is an eligible deduction u/s 80C and if the annual premium paid is less than 10% of the sum assured for the policies issued on or before April 1, 2012 and 20% for the policies issued prior to March 21, 2012, than the whole maturity proceeds will be tax free u/s 10(10D).
The deduction u/s 80C can be claimed for the premium paid towards the policy of self, spouse and children (married or unmarried). In no case premium paid for the policies of your parents, brother, sister or your in-laws are eligible for deduction u/s 80C.
Life insurance policy should be a pure term insurance policy and not an insurance-cum-investment policy like endowment or money back because these policies neither provide you enough risk cover nor the returns of 5% to 6% from these policies are able to beat inflation.
Finance bill 2014 has inserted a new clause that if the premium paid towards policy does not meet the criteria of 10% of sum assured than TDS at 2% will be deducted from the maturity amount including the sum allocated by the way of bonus.
Health Insurance Policies provides comfort in the event of illness as medical costs are touching the skies. Under Section 80D premium up to Rs.15,000 paid towards the health insurance of self, spouse and children is deductible and if you are paying health insurance premium for your parents than additional deduction of Rs.15,000/Rs.20,000 is also available making it total deduction of Rs.30,000.
However, no returns of maturity benefits are received from the health insurance policies.
Final Words of Wisdom
All of the above stated investments are eligible deductions under section 80C however; the threshold limit of Rs.1.50 lakhs applies aggregately means in a fiscal year if you invest Rs.75,000 in PPF and Rs.1 lakh in Sukanya Samriddhi Account Scheme, the maximum deduction you can avail is Rs.1.50 lakhs under section 80C. However, you can invest further but would not get any tax benefits.