Instruments that will help you save tax

No matter what individual investment goals we have, we all have one common goal of saving the maximum tax. In our country, salaried individuals can save tax on Rs.100,000 annually, over and above their respective tax-exemption limits. For this purpose, there are several instruments available in the market. It would be prudent to make use of them before the Direct Taxes Code, DTC, comes into effect, which would replace the Income Tax Act. Once the new law comes into effect, some of the instruments mentioned may not have the same tax benefits. The DTC may come into effect in the next financial year.

  1. Public Provident Fund: Also known as PPF, this instrument is a long term scheme by the government of India. This scheme is generally for 15 years. An investor can deposit a minimum of Rs.500 and maximum of Rs.100,000 annually. The interest rate on PPF changes every year and the current rate for FY 2012-13 stands at 8.8% per annum.

  2. Unit Linked Insurance Plans (ULIPs): ULIPs enjoy a tax rebate under section 80C. It provides with two benefits, the primary feature being insurance and second, it also has features of an investment product due to its units.

  3. Equity Linked Savings Scheme: ELSS helps in saving taxes under section 80C. It generally involves a lock-in period of three years and invests in the equity market. Returns on the scheme depend on market performance.

  4. Bank Fixed Deposits: Bank Fixed deposits or term deposits help save taxes under section 80 C. The investor who plans on investing in FDs should know that the money invested will be locked-in for a five-year tenure.

  5. Employee’s Provident Fund: Employee’s Provident Fund, which is also known as EPF, not only enjoys tax advantage on the principal amount but also the returns on the scheme. Income from the scheme is considered tax-free. Most companies give their employees the option of investing in EPF.

  6. National Savings Certificate: National Savings Certificate is an assured and government guaranteed tax-free investment. NSC also has an advantage of no upper limit to be invested annually. The scheme is attractive for those who wish to invest with a time horizon of 5-10 years. The interest rate applicable on NSC is 8.6% for five years and 8.9% for ten years.

  7. Medicals and Insurance: An investor can avail tax relief for reimbursements of medical bills up to a sum of Rs.15,000 annually according to the Income Tax Act. The Act also allows saving tax by buying insurance policy for yourself and your dependants.

  8. Tuition Fees:  Parents who are paying tuition fees for their children are eligible for tax relief under section 80C for the amount paid.

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