Did you know that there are several other-non-insurance-products
that can get the same tax benefit that an insurance policy does? Even
within insurance, there are plans that get tax deduction and work
better as a life cover. But these remain the financial world's best
kept secrets.
Here's a run down of products that get you the Rs1
lakh deduction. In some cases, you don't even need a further outflow of
money to get this tax break, you can claim it on existing investments.
We've split the products according to the risk-return attributes and
spending.
Zero-risk products
These carry either a
government guarantee or have a fixed interest payout. The first two
products should form the core of your 80C investments. And if you
exhaust the entire limit in this, no need to buy more.
1.
Employees' Provident Fund (EPF): The first scheme that you get to buy
the minute you begin work as an employee. Under this, 12% of your basic
(including dearness allowance and retaining allowance, if any) goes to
this fund and your employer matches this by 12% of his contribution.
From your employer's contribution, 8.33% goes towards the Employees'
Pension Scheme (EPS) and 3.67% to EPF. Your EPF earns a tax-free
interest that is currently 8.5% a year. It's not a good idea to reduce
your PF contribution, as some employers may suggest, since you get an
investment option that is one of the best in India in terms of risk-
and tax-free return.
Return 8.5%
Duration working life
Safety zero risk
2
. Public Provident Fund (PPF): An 8% 15-year cumulative recurring
deposit that is fairly illiquid and is good to use as a long-term
corpus building tool. Risk- and tax-free today, maximize your
contribution to Rs70,000 this year, irrespective of whether you need
the tax break or not. The new direct tax code rules will apply from
next year and we don't know the exact treatment of old accounts today.
Rs70,000 a year for 15 years at 8% will give you Rs19 lakh. Tax free.
Return 8%
Duration 15 years
Safety zero risk
3.
National Savings Certificate (NSC): Through this, Rs1 lakh grows to
Rs1.6 lakh in six years. The interest generated each half year is
treated as "reinvested" and becomes part of your overall 80C
contributions. But if you have exhausted the cover, you need to pay tax
on the interest.
Return 8%
Duration 6 yrs
Safety zero risk
4.
Fixed deposits for a duration of five years with banks and post
offices: One of the bug bears senior citizens had with section 80C was
that it leaned towards the younger generation by giving tax breaks for
long-term corpus building products or on home loans. There was nothing
that allowed a retired person to earn an income and yet get a tax
break. The extension of specific five-year bank and post office
deposits to come under section 80C fills this gap. The current rate of
interest is between 5.70% and 8.25% a year.
Return 5.70-8.25%
Duration 5 years
Safety zero risk
5
. Senior Citizens Savings Scheme (SCSS): It allows a retired person
having a lump sum to invest it at a reasonably good interest rate. If
you are 60 years old (or took voluntary retirement at 55), you can put
up to Rs15 lakh for five years in this scheme, earn 9% interest a year
and get the 80C benefit on Rs1 lakh. Interest, however, is taxable.
Return 9%
Duration 5 years
Safety zero risk
Market-linked products
6
. Equity-linked savings schemes (ELSS): These are diversified equity
mutual funds that allow investors with risk-taking ability to target a
higher return. You are locked into the investment for three years, but
the long-term capital gains are zero tax.
You can choose a lump
sum investment route or a systematic investment plan. The average
return in an ELSS scheme over the last three years was 8% and over the
last five years was 22%. Or Rs1 lakh invested five years ago will be
worth Rs2.7 lakh today . Look out for a full review on Tuesday.
Return market-linked
Duration 3-year lock-in
Safety market and fund
Manager risk
7
. Unit-linked insurance plans (Ulips): A hybrid product that includes
an insurance cover on your life along with a market-linked investment
plan. The premium needs to be paid for a minimum of five years. Ulips
work only in the long run of over 9-10 years. Given the
non-transparency and non-portability of the product in its current
state and sustained mis-selling in the industry, we do not recommend
that you use this vehicle for your 80C tax break. Look out for more
details on Ulips and other insurance plans on Wednesday.
Return market-linked
Duration 5-year lock-in
Safety market and fund manager risk
8.
New Pension System (NPS): This is a new, market-linked vehicle for
those who do not have an EPF facility to target long-term retirement
planning. Money Matters likes the product due to zero front loads, tiny
annual charges, full portability between schemes and fund managers.
Although NPS comes under section 80CCD, the available deduction is up
to Rs1 lakh under section 80C.
Return market-linked
Duration lock-in till age 60
Safety market and fund
Manager risk
Spending-linked
Starting
life with a home loan, a car loan, a furniture loan, kids' fees and
other runaway expenses? You can actually use two of your expenses to
fill the 80C tax break bucket, without spending more.
9. Tuition
fees: School fees of up to two kids (trust the government to push its
two-kid agenda in tax break deals as well!) can become part of your
section 80C tax kick. Pay by cheque and keep the receipts to file along
with your return.
10. Principal on home loan: Up to Rs1 lakh of
the principal on your home loan can be used as a deduction. Spouse is a
co-owner and borrower? You can claim double that.
Special case of insurance
11
. Life insurance premium: Anybody who's been working for over 10 years
is holding a minimum of two to three life insurance policies. The first
one will have a premium of around Rs5,000, the next could be Rs10,000
and a more recent one could be Rs60,000 a year. Tot up the total sum
assured or life cover, and you find you are holding under Rs 10 lakh of
life cover. So, we hold endowment and money-back plans that carry a
return of 3.5-4%. We would have been better off holding a PPF account.
But the agent never told us. The only insurance cover you need to cover
your life is a term insurance policy. New policies in the market cost
as little as Rs10,000 a year for a Rs50 lakh cover. The premium comes
under 80C as well. So, no more insurance this year.
