Thursday, December 15, 2011

Tax Investment Planning (India)

Tax Investments Planning in India
It is again the time of the year when you have to make your investments or else your 2 months salary is going to be deducted. I thought I will just share how I have planned for my tax saving & some of the investing options that we have.  I am giving it a ranking based on 5 stars. You can add  your thoughts on how you invested below, the opinions given below are personal and investing plans may differ from person to person, you are free to comment below if you agree or disagree with my ratings.

  1.   National Saving Certificate -  I think post office is a stable investment plan but then the lock in period is a bit too long, 6  years and the Interest earned is 8 % with half yearly compounding.  You can opt for premature encashment after 3 years but you will not get much. Tax saving under 80 C  My rating **
  2.   Fixed Deposit- Fixed deposit has a minimum lock in period of 5 years, it gives a return of only upto 8%, with half yearly compounding, the rate of returns can be even less  if adjusted to inflation, but I think it’s a good idea to have a flexible fixed deposit linked to your saving account so that some of your cash in hand gives a better return on interest than  saving bank interest of 3%. Tax saving is under 80 C. My Ratings ***
  3.   ULIP (Unit Linked Insurance Plan) – ULIP is a popular insurance scheme followed by many people as it is being promoted by LIC agents, I guess it’s great that it’s providing employment to lots of people, but then the loading charge for ULIP linked plans are upto 12% and 5-7% for subsequent years, it also has a lock in period of 3 -10 years.  If you take a insurance investment plan of three years, you would have hardly recovered your amount of investment, besides the amount of Insurance on your life is very less as it is usually about only 5 times the Premium amount. It is difficult to have your cake and eat it too with this investment plan, I would prefer other options rather than invest in ULIP. Tax saving under 80 C. My ratings for ULIP plans *.
  4.   ELSS (Equity Linked Saving Scheme) -  Equity linked saving scheme is a pure investment in Mutual funds and stock market without any insurance unlike ULIP but is not much promoted by investment agents as commission is low, about 2-3% of investment amount.  For tax purposes, it’s a minimum of three year investment and return back of your investment depending on the fund. If it’s a good mutual fund, you could get upto 30-50% of your investment, if the market goes down, you lose your investment.  In case you are investing for pure investment purpose and not for tax saving, you also have the option of investing by SIP (Systematic Investment Plan), which means you invest a small amount every month and you can with draw it anytime you like.  It is a good idea to mix your equity investment with debt and equity so that you can prevent yourself from huge losses in market.  Tax saving is under 80 C .My ratings ***
  5.   Pure Term Insurance-  Pure term insurance is another insurance product which is not much promoted but then again, I think it is a good insurance plan. With the case of Pure term insurance, with an investment of Rs3,000- Rs 4,000 depending on your age, you can have an insurance cover of upto Rs 50 lakhs, the only downside being that your premiums are not refundable. Tax savings under 80 C.  My ratings ***
  6.   Medical Insurance -  Medical  Insurance I feel are a must, as no one can for see when one will fall ill or need hospitalization.  It is advisable to check if there are riders and opt for them dpending on what riders they have. Also make sure you check the claim history of health insurance and empanelled hospitals by the Health insurance company before investing. You can claim upto Rs 15,000 for Insurance.  Tax saving under 80 D, in case of disability tax saving under 80 DD. My rating is ****
  7. Real Estate- Real Estate is also one of the best investment options around but then not everyone is rich enough to buy property or flat as property prices are high and so is the Equity Monthly Installment payment.  But you can also think of it in this way, if you can afford to pay the down payment,  you could be paying for your own house instead of renting a house for say Rs 10,000 or any amount. Besides, Real estate also gives us the privision for tax saving, so I would say real estate is a good investment option. Tax saving is under Section 24(b) .My ratings ****
  8.  EPF (Employee Provident Fund) – If you are a salried person, you don’t have much option with PPF, a small amount of your earnings are deducted for provident fund and an equal amount is contributed by the organization or company that you work for, it’s a very good investment option but you can only invest a limited amount. Tax saving is under 80C. My Ratings **** 
  9.    PPF ( Public Provident fund ) One of the oldest investment options, PPF scores on all grounds as it is one of the very few investment options that fall under EEE (exemptexempt-exempt) tax regime. This implies that not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax. PPF offers an interest rate of 8% compounded annually, with the maximum investment restricted to Rs 70,000 a year and mandatory investment tenure of 15 years. Tax saving is under 80 C. My ratings ****
  10. Rent – If you have a House Rent allowance, you will be able to claim for tax deduction upto the amount that is allowed in your salary slip. Tax saving is under 80 C. My ratings **
  11. Charity -  You can make donations to charity on the condition that your donations to charity is less than 10% of your income. But make sure you make donations to well known charity and trust so that you can follow it up. There are options for donations to charities to help orphans, help people in disaster’s etc.  You can availl of tax saving under 80 G of Income tax. My ratings ***
  12. Education -  You can avail of Income tax exemption for your children's education from School to College. You can also avail for coaching fees for competitive exam upto 2 children. You can avail of this tax saving under 80 G of Income tax. My ratings **

Now, I have shown above the various investment options,  you could be investing on this different options  but I would say, one of the best options would be to invest in Pure Term Insurance + Equity Linked Saving Scheme+ Real Estate. But then, that’s my personal choice. Investment decisions depends a lot on these following factors – your age, your monthly income & your future plans.
It is also advisable that if you  are still young, 30-40’s , you could invest more with risky instruments like Equity linked saving scheme , real estate etc as you are expected to have better future income at your disposal  as well as the time to wait for investments to mature, but if you are older, it’s better to invest in less risky investment instruments like post office, fixed deposts etc
Also, as pointed out earlier, if you are not investing for purely income tax saving purpose, it’s not necessary to invest for lock in period and you can adjust accordingly. Also, it’s always best to take the advise of your financial advisor  and Chartered accountant to advise you on the best options. 

Last but not the least invest in your health or else you will be spending all your investment and wealth in trying to save your health, hence the saying health is wealth still holds very true.
All the best on your income tax saving decisions.


  1. Very very useful post!!! Cleared a few doubts of mine too. Thanx for this.

  2. @ Mizohicans- Most welcome, Happy savings & Happy Christma....