Surprised to read about tax-planning in the month of April? Isn’t tax-planning supposed to be an ‘end of the financial year’ exercise? Well, the answer is no! Tax-planning isn’t an activity to be conducted in a rushed manner at the end of the year. Simply because, it forms an integral part of your financial planning activity. Tax-planning is as much about contributing to your financial goals as it is about reducing your tax liability. So, the right time to start thinking about tax-planning is now!
Then, there is the need to objectively consider your risk profile (among other factors) while conducting the tax-planning exercise. For example, risk-taking investors could hold a portfolio dominated by market-linked avenues like tax-saving funds (also known as ELSS) and unit linked insurance plans (ULIPs); on the other hand, risk-averse investors should be predominantly invested in assured return schemes.
Speaking of assured return schemes, the small savings schemes segment perhaps represents the most comprehensive pool of the former. More importantly, a number of small savings schemes are eligible for tax benefits under Section 80C of the Income Tax Act i.e. investments of upto Rs 100,000 per annum (pa) are eligible for deduction from gross total income. Traditionally, small savings schemes have formed the core of most tax-saving portfolios. In this article, we discuss the investment proposition offered by some small savings schemes that can also aid you with tax-planning.
1. Public Provident Fund
Investments in Public Provident Fund (PPF) are recurring in nature and run over a 15-Yr period. Annual contributions are mandatory to keep the PPF account active. The minimum and maximum investment amounts are pegged at Rs 500 pa and Rs 70,000 pa respectively. Only contributions of upto Rs 70,000 pa are eligible for tax benefits under Section 80C. Any amount invested over the aforementioned is returned without interest.
At present, PPF investments yield a return of 8.0% pa. However, it should be noted that the returns are assured but not fixed. This is because the rate of return is subject to revision i.e. it can be revised upwards or downwards thereby impacting the returns.
With no provision for a regular interest payout, PPF fares rather poorly on the liquidity front. Withdrawals can be made only from the seventh financial year. Furthermore, the amount that can be withdrawn depends on the balance in the PPF account in the earlier years.
Apart from Section 80C tax benefits on the amount invested, interest income from PPF investments is exempt from tax under Section 10(11) of the Income Tax Act.
Given that investments in PPF run over a 15-Yr period and that annual contributions are mandatory, it is an ideal avenue to build a corpus for long-term needs like retirement and children’s education. It will appeal to investors who accord higher priority to returns over liquidity.
2. National Savings Certificate
Investing in National Savings Certificate (NSC) entails making a lump sum investment for a 6-Yr period. While the minimum investment amount is Rs 100, there is no upper limit. Presently, investments in NSC earn a return of 8.0% pa, compounded on a half-yearly basis. In other words, Rs 100 invested will grow to approximately Rs 160 on maturity. Unlike PPF, the rate of return in NSC is locked in while investing; as a result, the investments are indifferent to any subsequent change in rates.
NSC scores poorly on the liquidity front. Interest income is received on maturity. Also, premature withdrawals are permitted only in specific circumstances like death of the holder, forfeiture by the pledgee or under court’s order.
Investments of upto Rs 100,000 pa are eligible for tax benefits under Section 80C. Furthermore, the interest accruing annually is deemed to be reinvested, hence it qualifies for deduction under Section 80C. However, the interest income is chargeable to tax.
Given its nature (lump sum investments), NSC is best suited for gainfully investing one-time surpluses and to provide for needs that will arise over a corresponding (6-Yr) timeframe. It will be apt for investors seeking returns over liquidity.
3. Post Office Time Deposits
Post Office Time Deposits (POTDs) are fixed deposits from the small savings segment. While investors can opt for 1-Yr, 2-Yr, 3-Yr and 5-Yr POTDs, only the 5-Yr ones are eligible for tax benefits under Section 80C. A 5-Yr POTD earns a return of 7.5% pa; the interest is calculated quarterly and paid annually. In other words, Rs 10,000 invested in a 5-Yr POTD will deliver an interest income of approximately Rs 771 pa. The minimum investment amount is Rs 200, while there is no upper limit.
POTDs fare favourably on the liquidity front, thanks to the annual interest payouts. Premature withdrawals are permitted after 6 months from the date of deposit; however, the same entails bearing a penalty in the form of loss of interest. Finally, any excess interest paid is recovered from the principal amount and the interest payable.
Investments of upto Rs 100,000 pa are eligible for tax benefits under Section 80C. The interest income is chargeable to tax.
The 5-Yr POTD can be utilised for generating an annual and risk-free income, alongside making a tax-saving investment.
4. Senior Citizens Savings Scheme
Unlike the other avenues that we have discussed so far, Senior Citizens Savings Scheme (SCSS) is open only to a section of the investor community i.e. senior citizens. Individuals who are 60 years of age and above can invest in the scheme; those who have attained 55 years of age and have retired under a voluntary retirement scheme can also participate in the scheme, subject to certain conditions being fulfilled.
The minimum and maximum investment amounts are Rs 1,000 and Rs 1,500,000 respectively. Investments in SCSS run over a 5-Yr period and earn a return of 9.0% pa.
Given that SCSS is targeted at senior citizens, the liquidity aspect has been adequately addressed; interest payouts are made on a quarterly basis i.e. on 31st March, 30th June, 30th September and 31st December every year.
Premature withdrawals are permitted after the expiry of 1 year from the date of opening of the account. In case of withdrawals made after 1 year but before the completion of 2 years, an amount equal to 1.5% of the initial amount invested is deducted. In case of withdrawals made on or after the expiry of 2 years, an amount equal to 1.0% of the initial amount is deducted.
Investments in SCSS are eligible for tax benefits under Section 80C. The interest income is chargeable to tax and subject to tax deduction at source (TDS) as well. Investors whose tax liability on the estimated income for the financial year is nil, can avoid TDS by furnishing a declaration in Form 15-H or Form 15-G as applicable.
Expectedly, SCSS is meant for senior citizens who wish to receive an assured income at regular time intervals. The tax benefits only add to the allure of the scheme.