As we near the last quarter of 2020/21, here’s a look at how best to review your tax savings and take steps, if needed, to add that extra bit of money in your pocket.
Individuals can save taxes either by investing in government-notified products or by claiming deductions or exemptions on certain type of expenses. When it comes to investments, the eligible products that give you deduction benefits are basically of two types — fixed-income investments and equity-related investments.
For fixed-income products, the minimum lock-in period is five years. The five-year tax-saving fixed deposit is available in most banks and post offices. One can invest up to ₹1.5 lakh in a single financial year, and get deduction benefit under Section 80C. However, the interest earned on this deposit every year is not exempted from tax. Moreover, due to significant reduction in overall interest rates, tax-saving FDs are no more the best bets. Banks offer a maximum interest of up to 6 per cent, and IndiaPost 6.7%.
The second option in the five-year term is the National Savings Certificate (NSC). Similar to FDs, the maximum one can invest is up to ₹1.5 lakh per financial year and claim deduction under Section 80C. Compared to bank FDs, NSC offers better annual return of 6.8 per cent.
“Tax-saving FDs offer periodic returns, while the NSC does not. Hence if regular returns are important to a person, tax-saving FDs would be better suited,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories.
There are also long-term fixed income options that help you maximise your tax savings. Public Provident Fund (PPF) is one of the preferred choices in this category. The minimum tenure is 15 years. The unique thing about PPF is that it not only offers ₹1.5-lakh deduction benefit under Section 80C, but the return is also completely tax-free. At 7.1 per cent, it offers one of the best annual returns among fixed-income products. For those with long-term life goals such as retirement or children’s education, PPF is a must-have.
If you have a girl child, you can earn a high return besides saving taxes with the Sukanya Samriddhi Account (SSA). The current annual return on SSA is 7.6 per cent. However, the product has very limited mid-term liquidity option, so deposit only an amount not needed otherwise.
One of the most preferred products for regular income in this category is the Senior Citizens Savings Scheme (SCSS), which offers an annual return 7.4 per cent. The interest amount is paid quarterly. You can get deduction benefit under Section 80C for an amount of ₹1.5 lakh invested in a financial year.
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