In the rush to make eleventh minute tax-saving investments, one always considers the investment with lowest lock-in period, highest returns and easy to invest options. But since taxation can eat into a big pie of your maturing returns, one should also assess how the investments are taxed upon maturity.
There are several options which come under the exempt-exempt-exempt (EEE) taxation ambit. The three ‘E’s represent the taxation status at the time of investments, growth and the maturity stage. So, an instrument that offers tax exemption at the time of investment, while the corpus is invested and earning as well as when an investor gets the money back upon maturity is always more beneficial than an option which is exempt-exempt-taxed at maturity (EET).
Let us examine some instruments that offer tax-free returns on maturity.
Public Provident Fund or PPF
The Public Provident Fund is a popular tax-saving instrument primarily because of the tax-free earnings one receives at the end of the 15 years long period. Extension of further 5 years won’t impact the tax-free nature of interest accruals and payments out of the Public Provident Fund.
Employee Provident Fund or EPF
The Employee Provident Fund corpus too is given out without deducting any taxes. The condition that one needs to meet is that the employee should complete five years in service to claim the amount tax-free. Also, if the amount is not invested in a recognized provident fund then the tax-benefit may be snatched away.
Employees can also increase their contribution of their salary to the EPF from 12% to 30%. This upgrades the EPF into VPF or Voluntary Provident Fund since the increased contribution by the employee is voluntary and not mandatory. The tax benefits of VPF are same as EPF. Hence, it also enjoys EEE status.
Offered by mutual fund houses, equity-linked savings scheme (ELSS) have the shortest possible lock-in period among all the investment options enjoying EEE tax treatment. As gains from equity investments are tax-free if shares and units are held for more than a year, ELSS funds too offer tax-free returns as they can be redeemed only after the lock-in of three years culminates. The dividends that one receives too are tax-free in the hands of investor as a dividend distribution tax is already levied before being doled out.
The most popular tax-saving investment of life insurance policies including traditional and unit-linked insurance plans offer tax-free maturity proceeds whether offered to investors themselves or heirs. But to receive the maturity amount tax free one needs to ensure that minimum five premiums are paid and the sum assured is 10 times the annual premium.
Sukanya Samriddhi Account
The recently launched Sukanya Samriddhi Account scheme for the girl child not only offers tax benefits under the section 80C, where one can invest and claim a deduction up to a maximum of Rs1.5 lakh per year, but also a tax free income at maturity (after the girl turns 21 years) too. The finance minister announced during the Budget 2015 that the interest accruing on deposits in SSA will be exempt from income tax.
The parents and guardians too would cheer the announcement made that, “Any payment from an account opened in accordance with the SSA Rules, 2014 shall not be included in the total income of the assessee.”
National is a highly secured savings scheme offered by the postal department which gives tax exempt maturity amount.
The Senior Citizen Savings Scheme offers tax benefits on investments under section 80C. Interest accrued is taxable which is deducted in the form of TDS if it exceeds a certain threshold.
5 Year Post Office Time Deposit
Another tax friendly scheme offered by post offices is 5 Year Post Office Time Deposit. It is a form of FD just like a bank FD. The invested amount is withdrawn with accumulated interest at the end of the maturity period.
5 Year Bank FD
Banks also offer tax saving FDs with a tenure of 5 years. Investment up to Rs 1.5 lakhs can be claimed as a tax deduction under section 80C while the maturity amount is fully tax-exempt.
ULIPs or Unit Linked Insurance Plans are insurance plans which also offer some return on investment like any regular investment scheme. ULIPs enjoy EEE status which means that you can enjoy tax gains on premium paid, interest accrued and maturity corpus withdrawn.
Tax-free bonds issued by infrastructure companies and institutions such as NABARD for long-term offer a coupon rate similar to interest rate. The “tax-free” refereed in the bonds is mistaken to be tax benefit at the time of investment, but the actual benefit is that the coupon earned at regular intervals and at the end of the tenure is tax free.
How can H&R Block help you?
There are several other tax saving options under the Income Tax Act, but you might fail to claim the tax benefits in the absence of proper knowledge and procedures. So, you should take help of tax experts for this job. Saving taxes and filing income tax return accurately becomes very easy when you have professional help. This is where we come into the picture. You can either use our intuitive e-filing income tax platform to easily file your tax return or let our tax experts file it for you. We have a team of in-house tax experts who can accurately file your tax returns online while giving you maximum tax benefits.