Tax saving schemes – India (Subjecting to current rules)

We get tax exemption under section 80C upto Rs 1,00,000. Govt gives us this exemption to indiretly force us to plan for our future. The investments we do can be categorized into risky and risk-free.

Risk-free investment gives us fixed returns where as risky will vary. It is always advised to properly diversify the risky investments.

Risk-Free Investments:

EPF : The Employee Provident Fund, or provident fund as it is normally referred to, is retirement benefit scheme that is available to salaried employees. Under this scheme, 12 % of employee’s salary is contributed towards the fund. This percentage is decided by the government. The employer also contributes an equal amount to the fund. However, an employee can contribute more than the stipulated amount (not sure about upper limit). So, let's say the employee decides 14% must be deducted towards the EPF; in this case the employer still pays 12% of your basic salary. Current interest rate 8.5%. The amount accumulated in the PF is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes jobs.

PPF : Public Provident Fund, You need not be a salaried individual to open a PPF account. Any individual can open a PPF account in any nationalized bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices. The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.Current intrest rate 8%. The accumulated sum is repayable after 15 years.

NSC bonds: National Security Certificate, issued by post-office.It is sold in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. So, if you want to invest Rs 30,000, you will have to buy three certificates of Rs 10,000 each.Current intrest rate is 8% and compounded half-yearly (twice a year), where as PF intrest rate is calculated anually. Note that it has 6 years locking period.

FD: Fixed Deposits for above 5 years are also considered for tax exemption.

Risky Investments

Mutual Funds : These are investment companies which have some dedicated experts for investing in stock market, etc.. . If you don’t have any idea about stock markets, etc... but still want to enjoy the advantages of stock trading , etc.. You can rely on the Mutual Fund companies and buy MF's from them. Note that all the MF are not considered for tax exemption, only the once with more than 3 yrs of locking period are considered.There are some risk and risk free investments which also cover insurance, all those can be categorized into 3 as follows:

Term-Insurance policy : You have to pay some amount every year (premium) for some X years. Unfortunately if you die before X years, your dependents get the assured amount depending on the premium. If you are alive at the end of X years, you don’t get any amount.

Endowment policy: You have to pay some amount every year (premium) for some X years. Similar to term-policy if you die before X years, your dependents get the assured amount depending on the premium. If you are alive at the end of X years, you get some amount. Note the difference between the term and endowment.

(Risk-free investment)ULIP: Unit linked plan, it is combination of term-policy and investment in stocks (kind of Mutual Funds). (Risky as investments in stocks are subjected to market risks).Please note that we should not ever go for Endowment or ULIP. I have attached a document which describes the truth behind the endowment policy. If you want to go for ULIP instead take a term-policy and mutual funds separately. High percentage of commission is given to insurance agents for endowment and ULIP that is why they always try to make us buy them. We should treat insurance and investment separately. So always go for term policy.

Home loans EMI you pay, have principal part and interest part. Initially interest part is more and gradually decreases. (say u take 25l@12% for 20 yrs, EMI is 27500. for first month principal part of EMI is 2500 and interest part is 25000)the principal amount is considered under 80E and interest is considered under section 28 (limit is 1,50,000)Say you take the loan with your father / spouse, then all are eligible for income tax benefit. EMI is broken in percentage of ownership percentages. You can also change (add n remove the owners of house) at any point of time.