TAX SAVING INSTRUMENTS

Equity Linked Savings Scheme

As the name indicates ELSS is an Equity Linked Savings Scheme launched by Mutual Fund Houses
in India. ELSS may be an existing scheme with a track record or a New Fund Offer. It may be an open
ended scheme or a closed ended in some cases.

Tax Exemption

Under Section 80C of Income Tax Act, you have the option to invest a sum of Rs.1,00,000/- and avail
exemption. The Equity Linked Saving Scheme (ELSS) is one such investment option.

Investments in (or contributions to) ELSS are eligible for exemption with a ceiling of Rs.1,00,000.

Benefits of investing in ELSS over other tax-saving instruments

Investments in ELSS enable an investor to claim deductions under section 80C upto Rs 100,000.
Since this is an equity-linked scheme, the earning potential is very high (although at a higher risk) as
compared to other tax-saving instruments.

The Systematic Investment Plan (SIP) is an effective way of investing in ELSS as the concept of
rupee cost averaging and the power of compounding work well.

The lock-in period is the shortest, three years, as compared to other tax saving instruments. The
maturity period for NSC and PPF is six years and 15 years respectively.

According to current tax laws, long-term capital gains on investment in equity oriented funds and the
dividends received on these investments are tax-free under section 10(38) and section 10(35)
respectively in the hands of the investor.

Past Performance of some of the top rated ELSS Schemes

Both ELSS and diversified equity schemes have the same risk profile. They are high risk - high return
investment avenues. The major difference is in terms of the mandatory lock-in period of three years
applicable to ELSS.

Sl Scheme Name Start Date NAV End Date NAV Return Approximate value
No (CAGR of Rs.10000 invested
%) (Rs.)

1 Canara Robeco 01/09/2006 17.8 01/09/2009 19.2 21.8 18,079

Equity Tax 3 4
Saver

2 Taurus Tax 01/09/2006 15.9 01/09/2009 28.5 21.51 17,950

Shield 1 6
3 Sundaram BNP 01/09/2006 22.4 01/09/2009 37.6 18.68 16,724
Paribas 8
Taxsaver

4 Sahara Tax 01/09/2006 18.2 01/09/2009 29.2 17.02 16,031

Gain 6 8

5 Fidelity Tax 01/09/2006 10.5 01/09/2009 15.6 13.95 14,801

Advantage 6 3

6 Magnum 01/09/2006 44.9 01/09/2009 49.5 11.48 13,859

Taxgain 9 4

7 Franklin India 01/09/2006 112. 01/09/2009 154. 11.17 13,743

Taxshield 3 3

8 HDFC 01/09/2006 125. 01/09/2009 165. 9.59 13,165

Taxsaver 9 8

Popular Tax saving mutual funds in India

• SBI Mutual Funds

• Prudential ICICI

• Franklin Templeton Mutual Fund India

• Standard Chartered Mutual fund India

• Bajaj Capital.

Premiums paid for Life Insurance

Category of assesses allowed deduction: Individual assessee and Hindu Undivided Family
assessee.

Eligible Savings: Premiums paid or deposited by assessee to effect or to keep in force

insurance on the life of following persons:

o In case of individual assessee – Himself/Herself, spouse, children of such individual

o In case of HUF assessee – any member

20% limit: If the amount of premium paid in a financial year for a policy is in excess of 20%
of the actual capital sum assured, then deduction will be allowed only for premiums upto 20%
of the sum assured.

Limit on amount of deduction: Deduction will be restricted to investments upto Rs 100,000

in savings specified under Section 80C (including life insurance premiums). The limit of
 deduction under Section 80C will be part of the overall limit prescribed under Section
80CCE.

Disallowance: This benefit will be reversed if the policy is terminated/cease to be inforce

within 2 years after the date of commencement of policy.

Premiums paid for Pension plans

Permitted Deduction: Section 80CCC allows for deduction of premiums paid under a
pension scheme. As per this Section, the whole of amount paid or deposited (excluding
interest or bonus accrued or credited to the assessee’s account, if any) as does not exceed the
amount of Rs 100,000 is eligible for deduction from the total income.

Receipt under Policy: Amounts received on surrender (whole/part) of annuity plan, amounts
received as Pension is taxed as income.

Limit: The limit of deduction under Section 80CCC will be part of the overall limit
prescribed under Section 80CCE.

Provident Fund (PF) & Voluntary Provident Fund

Provident Fund is deducted directly from your salary by your employer. The deducted amount goes
into a retirement account along with your employer’s contribution.
While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is
counted towards section 80C investments. You can also contribute additional amount through
voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is
tax-free.

Public Provident Fund (PPF)

The Public Provident Fund is a tax saving investment. The interest you earn on it is tax-free. Since it
is a scheme run by the Government of India, it is also totally safe.

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. The interest you will earn is 8% per annum.

You can make up to 12 deposits in one year. You don’t have to put in this money at one go.

The PPF account is valid for 15 years. The entire balance can be withdrawn on maturity, that is, after
15 years of the close of the financial year in which you opened the account. So, if you opened it in FY
2006-07 (this financial year), you will be able to withdraw it 15 years later, starting March 31, 2007
(end of this financial year). That means your PPF matures on April 1, 2022. It can be extended for a
period of five years after that. During these five years, you earn the rate of interest and can also make
fresh deposits. Once your account expires, you can open a new one. The only limitation is that you
cannot withdraw it until seven years are completed, after which 50% of your deposits can be
withdrawn, if needed.

Deposit date in Cheque payments :-Till recently, in case of a PPF when a subscriber used to make
deposits by local cheque or demand draft, the date of tender of cheque or draft at the accounting office
was treated as the date of deposit of PPF, provided the said cheque was duly honoured on presentation
for encashment.
National Savings Certificate (NSC)

NSC is also eligible for Section 80C tax deduction. These are the 6 year lock-in period instruments

Differences and similarities between the National Savings Certificate (NSC) and PPF

National Savings Certificate (NSC) Public Provident Fund (PPF)

Interest Paid: 8%, compounded half-yearly Interest Paid: 8%, compounded annually
No monthly/yearly payments No monthly/yearly payments
Minimum investment: Rs 100 Minimum investment: Rs 500 (required annually)

Maximum investment: No Limit Maximum investment: Rs 70,000

Duration of investment: 6 years Duration of investment: 15 years
Can be used as a security for mortgage and other Cannot be used for such purposes
purposes
Tax benefit under Section 80 ‘C’ available. Tax benefit under Section 80 ‘C’ available.

Maximum limit: Rs 100,000 Maximum limit: Rs 70,000 (limit of the investment

in PPF)
Good medium-term investment option Good long-term investment option
Interest if fully Taxable Interest is fully Exempt

SEZ

Investments made by individuals and HUFs in issues of shares and debentures by SEZ units qualify
for additional rebate u/s 88.

Post Office Schemes

It is one of the best Income Tax Saving Scheme. It can be operated by either singly or jointly. In case
of minor, with parent/ guardian. It is available throughout the year. There are several types of post
office schemes depending upon the type of investment and maturity period. Post office schemes can
be divided into following categories:
 Monthly Deposit
 Saving Deposit
 Time Deposit
 Recurring Deposit

Minimum tenor 5 years.

Infrastructure Bonds

Investment in bonds issued by specified Infrastructure companies is also eligible for Section 80C
deductions. Investment in Infrastructure bonds is just one of the various options available for the
purpose of Section 80C deduction.

NABARD Bonds

Investment in notified bonds issued by National Bank for Agriculture and Rural Development
(NABARD) is also eligible for Section 80C deduction
Home Loan Principal Repayment

Your EMI consists of two components, namely principal and interest. The principal component of the
EMI qualifies for deduction under Section 80C.

Stamp Duty and Registration Charges for Home

The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration
of the documents of the house can be claimed as deduction under section 80C.
However, this can be done only in the year in the year of purchase of the house.

Five Year Bank Fixed Deposits

Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for
section 80C deduction.

Child’s Education Expenses

Children’s education expenses are also tax deductible under 80C.

Insurance Products

Almost every kind of Insurance Product is Tax Deductible under 80C such as Health Insurance,
Accidental Insurance, ULIPs, Child Insurance and Future Plans, Pension Plans, Retirement Plans and
every other thing related to the Insurance.

The Maximum amount of deduction that an assessee can claim under Sections 80C, 80CCC and
80CCD will be limited to Rs 100,000.

Illustration of Tax exemption for a male person less than 65 years in receipt of salary income for the
assessment year 2009-10:

Particulars Without Investment With Investment

Gross Total Income Rs.7,50,000 Rs.7,50,000

Exemption Under Section 80C Nil Rs.1,00,000

Total Income Rs.7,50,000 Rs.6,50,000

Tax on Total Income Rs.1,30,000 Rs.1,00,000

Tax saved on Investment Nil Rs.30,000

Lock-in
If you compare the lock-in periods for various instruments eligible under Section 80C of Income Tax
Act, you will notice that ELSS has the least lock-in period.
 Instrument Lock-in Period

ELSS 3 Years (or 1095 days) from the date of allotment of the respective Units

Bank Fixed 5 Years

Deposit

PO Time Deposit 5 Years

NSC 6 years

PPF 15 Years (Partial withdrawal after 6 years)

High Risk-High Return

Among all investment avenues available under Section 80 C, ELSS has potential for highest returns.
Investments in public provident fund (PPF), National Savings Certificate (NSC), and Bank Deposits
earn income of a ‘fixed’ nature, i.e. they give returns of a fixed nature and not more. On the other
hand, ELSS being an equity product can boost returns far beyond any other fixed income instrument
like a PPF or NSC. These returns could be by way of dividend or capital appreciation in the net asset
value (NAV) at the end of 3 years.

Investment Risk Return Rate of Interest/Dividend Tenure Taxability

Instrumen Return* Receipt of Interest
t Income
ELSS High High Depends on Upon Declaration Minimum Dividends
Market of Dividend Lock-in is are Tax
Performanc three years Free in the
e hands of
the
investor
NSC Low Low 8% On Maturity 6 Years Taxable
PPF Low Low 8% On Maturity 15 years Tax Free
Bank Fixed Low Low 7.5% (SBI Monthly/Quarterl 5 Years Taxable
Deposits Rate for y
general
public w.e.f.
27.07.2009
– Source
SBI
Website)
PO 5 Year Low Low 7.5% Annual 5 Years Taxable
Time
Deposit
Alternative Tax-Saving Routes

Because of the rising expenses on healthcare, education and rental housing, Individuals can now go
beyond the Section 80C and avail tax exemptions.

Medical Expenses

Income tax act has more than one provisions to offer relief to those incurring these expenditures

Section 80D

According to section 80D, the amount of premium paid by an individual is eligible for deduction from
the total taxable income under this section. Currently the maximum amount of deduction that can be
availed under this section is Rs.15,000 if the policy covers self, spouse and/or dependent children and
an additional Rs.15,000 for the policy purchased exclusively for dependent parents.

Thus, an individual can claim up to Rs.30,000 as deduction from the total taxable income. In case the
dependent parents are senior citizens, then the deduction rises to Rs.20,000 for the medical premium
paid for their policy alone.

The Individual can thus claim for a total of Rs.35,000 as deduction from the taxable income.
Interestingly, if the individual himself and/or his spouse are also senior citizens, they shall also be
entitled to a maximum deduction of Rs.20,000 instead of Rs.15,000. If such an Individual also pays
medical premium for dependent parents, who are also senior citizens, the maximum allowable
deduction for such an individual thus shall be Rs.40,000 per annum.

Section 80DD

Expenditure incurred by an individual for treatment of dependent spouse, children, parents, brothers
or sisters; suffering from following disabilities is eligible for deduction from the total taxable income
under this section.

- Autism
- Cerebral Palsy
- Mental Retardation

The amount admissible as deduction under this section is Rs.50,000 per annum or the actual amount
expended for the treatment of such a dependent, whichever is lower. If the disability is reckoned to be
of a severe nature (80% or more) then the maximum permissible amount of deduction shall be
Rs.75,000 per annum.

This deduction however not be available for a dependent who has claimed any deduction under
section 80U of the I-T Act.

Section 80U

Here an Individual tax payer himself has been certified by a medical authority to be suffering with
any of the above disability, a deduction of Rs.50,000 per annum and if the disability is of a severe
nature, a deduction of Rs.75,000 a yea (1 Lakh after 1st April 2010) can be claimed from the total
taxable income under section 80U of the I-T Act.
Section 80DDB

Expenditure incurred for medical treatment of self or dependent spouse, children, parents, brothers or
sisters with respect to specified diseases like following are eligible for tax deduction.

- Neurological Diseases such as Dementia, Dystonia, Motor Neuron Disease, Ataxia, Chorea,
Hemiballismus, Aphasia and Parkinsons where disability level has been certified to be 40% and
above.
- AIDS
- Cancer
- Hematological Disorders – Hemophilia and Thalassemia
- Chronic Renal Failure

The maximum admissible deduction is Rs.40,000 per annum. In case of a Senior citizen, it is
Rs.60,000 per annum

Section 80E - Educational Expenses

Under the Section 80E, Deduction in tax is available for higher education only with respect to
repayment of interest on loan taken for higher education.

Any individual who takes a loan from a recognized financial institution to finance the higher
education is eligible for tax deduction.

As the section does not specify any limit on the amount of deduction that can be claimed, the entire
actual amount paid as interest on loan shall be admissible for deduction. Earlier this section was
restricted to loan taken to finance full time graduate or post graduate course in engineering, medicine,
management or post graduate course in applied sciences or pure sciences including maths and stats.

Housing Rentals

Those who have purchased a house financed by loan can claim an exemption on the amount of
interest paid on such loan (up to maximum Rs.1.5 Lakh), others who stay in rental accommodations
can seek tax relief in Section 80GG of the I-T Act.

This section is applicable to either self employed individual or an employee who does not receive
house rent allowance (HRA) from his employer. (All salaried employees in receipt of HRA can claim
an exemption on the accommodation rentals under Section 10(13A) of the I-T Act)

The Deduction under Section 80GG can be availed provided the Individual, his spouse or minor
children do not own any residential accommodation at the place where they reside and are employed
or carry out their business or profession.

The deduction admissible under this section shall be minimum of the following – Rs.2000 per month
or 25% of the Total Income or the actual rent paid in excess of 10% of the total income.