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Tax Savings Investments - Small Savings 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 100000 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 70000 pa respectively. Only contributions of up to Rs 70000 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. Liquidity 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 Furthermore the amount that can be withdrawn depends on the balance in the PPF account in the earlier years.

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Taxation Apart from Section 80C tax benefits on the amount invested interest income from PPF investments is exempt from tax under Section 1011 of the Income Tax Act. 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. Liquidity 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 courts order. Taxation Investments of up to Rs 100000 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. 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 10000 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. Liquidity POTDs fare favorably 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. Taxation Investments of up to Rs 100000 pa are eligible for tax benefits under Section 80C. The interest income is chargeable to tax. 4. Senior Citizens Savings Scheme

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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 1000 and Rs 1500000 respectively. Investments in SCSS run over a 5-Yr period and earn a return of 9.0 pa. Liquidity 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. Taxation Investments in SCSS are eligible for tax benefits under Section 80C. The interest income is chargeable to tax savings 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. Source: http://bit.ly/2bl8ul8