Use these 6 products to get not just section 80C tax benefits but also a leg-up to financial goals

Jayachandran/Mint

If you have been following Mint Money’s advice, by now your job of claiming tax benefits would be more or less over—you would have collected all the investment proofs and premium receipts and submitted to your organization. But if you haven’t invested well in time, you must be scrambling to do so to be in a position to claim tax deduction of Rs.1 lakh under section 80C, and thus reduce your taxable income by that much.

In your hurry you may overlook the basic fact that tax planning is just a small part of the larger goal of financial planning, and making classic mistakes like exhausting the Rs.1 lakh limit through insurance plans that give suboptimal returns.
You still have a small window of opportunity to invest and we suggest you do it wisely. Here are six financial products that not only help you soak up your 80C benefit, but also make for sound investment and insurance choices that fit your overall financial plan.




Employees’ Provident Fund

For salaried individuals, Employees’ Provident Fund (EPF) is a good long-term investment vehicle. Every month, you and your employer contribute 12% of your salary into the EPF account. While it is mandatory for employees having a basic salary of Rs.6,500 per month, for those earning above that limit, the contribution is voluntary. The 12% that you contribute qualifies for tax deduction up to Rs.1 lakh. From your employer’s contribution, 8.33% goes into the Employees’ Pension Scheme (EPS), which offers pension for life from the age of 58 years. The remaining corpus then earns interest at a rate that is declared by the Employees’ Provident Fund Organisation (EPFO) each fiscal. This fiscal, the rate is 8.75%.
“In the debt category, EPF and PPF (Public Provident Fund) are by far the best products that offer risk-free and tax-free returns. This also means that over a long term, the returns are able to beat or be in line with inflation,” says Anil Rego, founder and chief investment officer, Right Horizons, a financial planning firm.
Apart from the tax deduction, the interest that your EPF kitty earns and the money that you get are both tax-exempt, if you encash your EPF after five years. With EPF, you not only get tax benefits but can also save for your retirement.

Public Provident Fund

As the name suggests, Public Provident Fund (PPF) is for the public—employed, self-employed or unemployed. PPF is now market-linked. What this means is that every year, PPF returns are pegged to the average yield of government securities of similar maturity from the preceding year with a positive spread of 25 basis points. This rate is declared before 1 April each year for the following fiscal. For FY14, the rate of interest on PPF is 8.70%.

Your PPF contributions qualify for a tax deduction of Rs.1 lakh. On maturity, the proceeds, too, would be tax-free. In tax parlance, PPF like EPF is an exempt-exempt-exempt (EEE) product. PPF is a 15-year product and you need to make annual investments—minimum Rs.500 and maximum Rs.1 lakh. PPF can be extended in blocks of five years.

In the debt space, PPF again is one of the few products capable of offering tax benefits as well as a real rate of return (i.e., returns over inflation) over the long term. PPF works best to for long-term goals such as buying a house, making a down payment or child’s education or marriage. And since it can be extended, it is a good vehicle to use to build a retirement nest egg.

Equity-linked schemes

If you seek equity exposure along with section 80C tax kick, equity-linked saving schemes (ELSS) are a must-have. An ELSS is an equity diversified scheme that invests across scrips and sectors just like any other diversified equity mutual fund. The only difference is that ELSS offers tax deduction benefits up to Rs.1 lakh under section 80C and comes with a three-year lock-in period. After three years, you are free to exit or stay invested to enjoy equity returns over a long period of time.

Among the tax-saving options under section 80C, ELSS is the only pure equity vehicle. The National Pension System (or NPS, more on this later) offers partial equity exposure. The fact that it comes with a lock-in of only three years is also a plus although to enjoy the benefits of an equity scheme you need to stay invested for the long term.

Mint Money recommends three ELSS that form a part of our overall selection of mutual funds, Mint50 (see table).

Life insurance

If you have dependants—spouse, children and/or parents—life insurance is a must for you. The premium that you pay for such policies qualify for a tax deduction so long as the sum assured or insurance cover is at least 10 times the annual premium. Here, term plans are the best options as they charge only for the insurance part with no investment returns at the end of the tenor.

We like term plans for two reasons: one, term plans provide a large cover for a relatively lower premium compared with other policies. Two, it’s a plain vanilla plan that only offers insurance. Others, such as traditional policies, usually fail to give you decent insurance cover as well as good returns.

And now buying a term plan has become more attractive. You can buy one online just like you would an air ticket. Of course, the know-your-customer formalities are done offline and you may have to undergo medical check-ups.

The other attraction is in features. Recently launched online term plans give you the option to stagger the sum assured so that your nominees don’t have to deal with a big lump sum insurance corpus.





National Pension System

The NPS has been designed solely for retirement saving. It limits equity investment to 50% making it more suitable for conservative investors or those who want balanced investments. Being a retirement product, it has a lock-in till 60 years of age. But keeping in mind recommendations by the Pension Fund Regulatory and Development Authority Act, 2013, draft guidelines have been released to allow withdrawal up to 25% of contributions for events such as medical emergencies, purchase of house and higher education. The final guidelines are still awaited.

You can begin with a minimum annual contribution of Rs.6,000 in the funds and fund manager of your choice. There are three funds to choose from: one has an equity exposure of up to 50%; one invests in fixed income instruments other than government securities; and the third one invests in government securities. Your contribution qualifies for a tax deduction up toRs.1 lakh under the overall section of 80C. On maturity, you can withdraw up to 60% as lump sum, the remaining 40% goes into buying an annuity, a pension product that pays you periodic income. The 60% lump sum is taxable for now, but is likely to soon enjoy EEE status. The fund management cost of NPS is at present 0.25%, which makes it one of the cheapest managed funds.

“The fact that NPS offers limited liquidity makes it easier for people to invest for the long term. But we still need tax-free status of the annuity and lump sum maturity corpus, which should happen soon,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories, a financial planning firm.

Five-year fixed deposits

Fixed deposits (FDs) are useful to target medium term goals. So if you are in the lower tax bracket or want guaranteed income, five-year FDs that come with 80C benefits are a good option. “FDs should be considered only by those who are in the lower tax bracket or would like to trade off returns for liquidity,” says Rego.
Even as you go through these products, keep in mind your age, investment horizon and goals. “Those in their 30s should target about 50-70% of their 80C investments in ELSS and about 30% in EPF, PPF and NPS. This ratio will change with age: the older you get, the more you put in safe instruments,” says Sadagopan.

Even though you may be in a rush, there is no reason why your money can’t get the twin advantages of tax benefits and better returns.