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H&R Block – Three investments that are tax free on maturity


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.

The Public Provident Fund is a popular tax-saving instrument primarily because of the tax-free earnings one receives at the end of the 16-year long period. Extensions of further 16-years won’t impact the tax-free nature of interest accruals and payments out of the Public Provident Fund.
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.

Tax-saving equity funds
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.

Life Insurance
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 (SSA) 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.”

Apart from these instruments which offer tax exemption at the investment stage, there are others where one cannot claim exemption while investing, but the earnings and the maturity proceeds are tax-free if held for long-term (12 months for equity).

These instruments are listed shares, equity and balanced funds, where no tax is applicable on gains if they are held for more than a year. Another good news is that although dividend amount needs to be declared in the income tax return, the amount received is fully exempt from taxes.

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.

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H&R Block India
H&R Block India is the subsidiary of the world's leading tax filing company, H&R Block, US. In India we provide online and personalised tax filing services for individuals, professionals and businesses. We also provide managed services for GST.

1 Comment

  1. Prabhakar gupta says:

    I am interested to know how to contribute for National Pension Scheme and my age is about 57 years