March 31st is nearing; I have to make some investments somewhere. Do you know anybody, who can help me to invest in some investments?
This is what we hear in offices and houses in the time between October and March. We all work 24*7 to make money but we don’t even think of spending few minutes a day to manage our hard-earned money, which ends up with killing our own dreams and plans made for life. We shouldn’t invest our hard earned money just for the heck of doing it.
Tax saving helps us to reduce our tax liability up to certain limit only and proper tax planning help us to save considerable amount of money every year. We have different investment options which help us to save tax, but very few will help us to create wealth and have got less charge.
Below are the lists of few investment products which help us to save our tax:
1. Employee Provident Fund
2. Public Provident Fund
3. National Savings Certificate
4. Long term Government Securities
5. Bank Deposits
6. Life insurance Products
7. Pension Products
8. Mutual Funds
1. Employee Provident Fund (EPF):
EPF take care need of fund for Retirement, Medical emergencies, House purchase, family obligations, education of children and buying an insurance policy. Your contribution in EPF scheme, which is 12% of basic salary generally, builds a fund available when you retire. The fund is available for some other specific purposes also like, purchasing land or house repaying loan for the same, children education and marriage etc. Employer contribution is also 12%, a part of which goes towards pension fund. An employee can contribute more than 12% also towards building up the fund.
2. Public Provident Fund:
Public provident fund or PPF offers good returns with safety and flexibility that is why it is one of the most popular tax saving product.
PPF account can be opened with specified branches of post office or nationalized bank on self or family members’ name. Account has 15 years term that can be extended in the blocks of 5 years after completion of the term. It offers 8% per annum yearly compounded interest. Contribution can be minimum Rs.500 to maximum of Rs.70000 in a year; that can be deposited monthly or yearly.
Apart from qualifying for section 80C, interest earned is free, maturity withdrawals are tax-free and it cannot be attached under the decree of any court of law.
From PPF, Loan can avail from the third year to sixth year up to 25% of the amount available in the preceding second year. Partial withdrawals can be made once every year at any time after sixth year. The amount of withdrawal is limited to 50%of the balance at credit at the end of 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower.
3. National Savings Certificate:
National savings certificate (NSC) remains the on shelf tax savings product. Investment in NSC can be made at specified post offices, in denomination of Rs.100, Rs.500, Rs.1000, Rs.5000 and Rs.10000 without any upper cap on investment. The certificate matures in six years and pays 8% half yearly compounded interest. Maturity proceeds of NSC are completely tax free. Premature encashment of NSCs are not allowed, however these can be kept as security to avail loan from banks. Interest earned on NSC is also an investment under section 80C.
4. Long Term Government Securities:
Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments.
Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. The salient features on T-Bills are:
These are zero coupon bonds, which are issued at discount to face value and are redeemed at par.
No tax is deducted at source and there is minimal default risk.
The maximum tenure of these securities is one year.
5. Bank Deposits:
Bank deposits are the most popular among fixed income investors. Safety, liquidity and convenience are being the prime reasons for gaining the investors confidence in banks; apart from safety of deposits. Bank fixed deposits are new entrants in 80C league. These form part of overall limit of Rs.100000 for deposits tenure of 5 years or more. However, interest on such investment is not tax exempted.
6. Life insurance Products:
Investing in life insurance has got a new look with the launch of ULIP’s (Unit Linked Life Insurance Plans) in the Industry. Yesteryear's we had the conception that insurance is all about life cover, risk cover, death benefit. But, now the rapid growth evidencing the entry of private players in to the market has created the wave of ULIP’s, which now has become one of the major investment avenues for Indian Investors.
Following are the broad categories of insurance plans available in the market:
1. Whole life policies
2. Endowment Policies
3. Term policies
4. Money Back Policies
5. Specialized Policies
6. Single Premium Policies
7. Unit Linked Policies
The tax benefit on investments in life insurance up to Rs.100000 can be availed in a financial years.
7. Pension Products:
A pension is a long term savings plan. Monies saved build up a retirement fund. This fund provides a source of regular money to live on in your retirement. It is one of the most tax efficient ways to save money.
When people are investing for the long term, it's important you have the freedom to choose how and where to invest your money - and the option to change your choice of investments you need or want to.
Most people need a pension because:
People are living longer: retirement could make up a third of your life.
They'll need money for their increased leisure time during retirement.
8. Mutual Funds:
A mutual fund is a trust, which combines the investments of various investors having similar financial goals. The trust issues the units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, according to the objectives of the scheme. The investment provides return in the form of dividends, interests and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds.
Investment in mutual funds is advantageous for good number of reasons; Professional management of funds, diversification of investments, tax benefits, liquidity are few to mentioned here.
When a new scheme is launched, funds are available to subscription at par value, known as NFO. Subsequent to NFO, units are available for selling and repurchase based on Net Asset Value or NAV. NAV is market value of all assets net of liabilities. NAV per unit is a common performance indicator of the fund.
But in Mutual Funds only Equity linked savings schemes (ELSS) gives tax benefit.
Each of the above mentioned investment options have got their own advantages and disadvantages. But selecting the right one based on your needs and requirements are very important. I do not recommend one option as the best and the other as bad, But I suggest you to deeply analyse your needs before investing, so that the wealth creation process will be fruitful and profitable.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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