In case you are struggling to choose a tax saving investment, here’s a quick primer on the current interest rates and how to invest in the available debt tax saving investments.
But before you get down to choosing a tax saving investment you should first calculate how much you need to invest to save tax. There are certain expenditures and mandatory investments that are allowed under section 80C of the Income-tax Act, 1961 to save tax up to Rs 1.5 lakh. You may have already incurred these expenditures or made some of these investments. Therefore, before making tax-saving investments, one must check whether one is required to make additional investment to save tax.
1. EPF and VPF
EPF: If you are a salaried employee, covered under the Employees’ Provident Fund (EPF) Act, then your contributions to EPF would also qualify for section 80C tax rebate. This is a mandatory investment that automatically happens if you work in a company covered under the EPF Act. The interest you earn on your EPF contributions is fixed annually by the Employees’ Provident Fund Organisation (EPFO) in consultation with the government. Recently, EPFO announced an interest rate of 8.55 per cent for the financial year 2017-18.
However, the contributions made by you to EPF is deducted as a fixed percentage from your basic salary plus dearness allowance (DA) which might not be sufficient to use up the entire tax saving limit under section 80C.
According to the EPF rules, an employee makes contribution of 12 per cent of his basic salary plus DA on a monthly basis. Therefore, someone having Rs 20,000 as his monthly basic will be contributing Rs 2,400 on monthly basis or Rs 28,800 annually. This is far less than the permissible limit of Rs 1.5 lakh under section 80C of the income tax Act.
Voluntary Provident Fund (VPF): If the amount deducted from your salary is insufficient to avail the full benefit under section 80C, then you can make additional contribution to provident funds via VPF or Public Provident Fund (PPF). The benefit of VPF is available only to salaried person covered under EPF. The rules for EPF and VPF are same. This will be deducted from your salary and thereby decreasing your take-home salary. Both EPF and VPF are EEE (exempt-exempt-exempt) investments. The EEE status means that the amount invested, interest earned, and maturity proceeds are exempt from tax.
Interest rate offered: 8.55% for FY 2017-18
Maximum investment amount: Up to 100% of basic salary and DA
How to invest: Employee needs to inform his employer by submitting the same in a prescribed format and employer then has to start deduction of the same.
Tenure: Same as EPF
The interest rates offered on EPF and VPF are the same. The above mentioned rate is applicable only FY 2017-18.
2. Public Provident Fund
PPF is one of the most popular tax-saving investment avenues mainly because it enjoys an EEE tax status. Any Indian resident, salaried, self-employed or even a housewife can invest in PPF. An individual also has the option to open a PPF account on behalf of his minor child. A single contribution is required every year to keep the account active. You need to make a minimum annual contribution of Rs 500 to keep the account active. The interest under this scheme is calculated on a monthly basis but is credited annually.
Interest rate offered: 7.6% (As declared by the finance ministry for the January-March 2018 quarter)
Maximum investment amount: Rs 1.5 lakh in a financial year
How to invest: You can invest via banks, post office, and even using your Internet banking.
Tenure: 15 years
3. National Savings Certificate VIII Issue
Any investments under the 5-year NSC VIII issue are eligible for deduction from gross total income under section 80C. The interest is compounded annually, reinvested and paid at the time of maturity. Also, the interest earned is taxable in your hands. At the time of maturity, no tax is deducted at source. You have the option to take loan against these investments. The interest reinvested is also eligible for deduction under section 80C.
Interest rate offered: 7.6% (As declared by finance ministry for the January-March 2018 quarter)
Maximum investment amount: No limit but tax benefit is available only up to Rs 1.5 lakh under section 80C.
How to invest: One can buy NSC certificates from any post office
Tenure: 5 years
4. Five-year fixed deposits
Tax-saving fixed deposits (FDs) of five years held with a bank or post office also offers tax benefits under section 80C. The interest earned on these FDs is taxable in the hands of the investors. Senior citizens are offered slightly higher interest rate on the bank FD. However, this differential is not available on a post office FD. Do keep in mind that you cannot take loans against these fixed deposits. Further, you cannot prematurely encash the bank FDs before the completion of five years.
Interest rate offered: 6% to 6.5% (varies from bank to bank), 7.4% (post office FD as declared by finance ministry for the January-March 2018 quarter)
Maximum investment amount: No limit, but tax break can be availed up to a maximum Rs 1.5 lakh under section 80C.
How to invest: One can visit either a bank branch or post office to open an FD.
Tenure: 5 years
5. Sukanya Samriddhi Account
You can only invest in this scheme if you have a girl child. The account can be opened any time after her birth till the time she turns 10. The account can be opened for a maximum of two girl children and you cannot open two accounts for one girl. While opening the account, you will be required to submit the birth certificate of the girl child along with other documents such as proof of identity, proof of address etc.
Interest rate offered: 8.1% (As declared by finance ministry for the January-March 2018 quarter)
Maximum investment amount: Rs 1. 5 lakh in a financial year
How to invest: Account can be opened with at post office or authorised bank branches
Tenure: The account matures on the completion of 21 years from the date of opening or whenever the girl child gets married, whichever is earlier, subject to certain conditions.
6. Senior Citizens Savings Scheme
Only senior citizens can invest in this scheme. Apart from its tax benefit, the scheme also offers quarterly interest payments which can be a source of income for them. Post maturity, account can be extended for three years. However, tax benefit will not be available on the extension. One can invest in the scheme either individually or jointly with the spouse. There is no limit on the number of accounts that can be opened, but it should not exceed the maximum investment limit. Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not allowed to invest in this scheme.
Interest rate offered: 8.3% paid quarterly (As declared by finance ministry for the January-March 2018 quarter)
Maximum investment amount: Rs 15 lakh. Tax benefit under section 80C is available up to Rs 1.5 lakh.
How to invest: Investment can be made at authorised post office or bank branches.
Tenure: 5 years. Post maturity, account can be extended by 3 years.
Watch outs
The interest rate offered on PPF, NSC, 5-year post office FDs, Sukanya Samriddhi Yojana, and Senior Citizens Savings Scheme are reviewed by the government every quarter. The interest rates mentioned above are applicable for the investments made between January 1, 2018 and March 31, 2018. Banks decide the interest on the tax-saving FDs offered by them.
