The PPF is a very good investment option and the Budget has only made it more attractive by enhancing the annual investment limit to Rupees 1.5 lakh. The maximum investment of Rupees 1.5 lakh in a year can be done as a lump sum or as installments on any working day of the year. The PPF account matures in 15 years, you can extend it in blocks of five years each. The PPF is useful for risk-averse investors, self-employed professionals and those not covered by the EPF.
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-saving options under Section 80C. Being equity funds, these schemes can generate good returns for investors over the long term. The minimum investment in ELSS funds is very low. Though regular equity mutual funds have a minimum investment of Rupees 5,000. you can put in as little as Rupees 500 in an ELSS scheme. Unlike a Ulip’s, pension plan or an insurance policy, there is no compulsion to continue investments in subsequent years. To make most of ELSS funds, stagger your investment over a period of time instead of putting a large sum at one go. One problem with ELSS is that you cannot swith funds from equity to debt and debt to Equity as per the market conditions.
The 2010 guidelines have made Ulips more customer-friendly. Premium Allocation and Fund management charges which were significant in ULIPS have drastically came down making some of the ULIP investments cheaper than a normal Mutual Fund. There is no other charge except for the risk cover provided by the policy. The returns from ULIP investments are Tax Free.
This assured return scheme is the best tax-saving avenue for senior citizens. However, the Rs 15 lakh investment limit somewhat curtails its utility. The interest rate is 100 basis points above the 5-year government bond yield. The interest is paid on 31 March, 30 June, 30 September and 31 December, irrespective of when you start investing.
Its low-cost structure, flexibility and other investor-friendly features make the New Pension Scheme an ideal investment vehicle for retirement planning. The scheme scores high on flexibility. The minimum investment of Rs 6,000 can be invested as a lump sum or in instalments of at least Rs 500. There is no limit. The investor also decides the allocation to equity, corporate bonds and gilts. Be ready for a lot of legwork before you can buy.
Bank FDs and NSCs
Don’t get misled by the high interest rates offered on the 5-year bank fixed deposits. Interest income is fully taxable so the post-tax yield may not be as high as you think. In the 20 per cent and 30 per cent income tax brackets, it is not as attractive as the yield of the tax-free PPF.
Life Insurance plans
Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly, they are still the worst way to save tax. The tax saving is only meant to reduce the cost of insurance. It is not the core objective of the policy.
The charges of pension plans offered by life insurers are significantly higher than those of the NPS. The difference can snowball into a wide gap over the long term. The other problem is that annuity income is still not tax-free, which makes pension plans rather unattractive for retirees.