Fixed incomes that also save tax

Investors who are conservative or risk averse, generally opt for fixed income schemes. Fixed income schemes by nature are considered to be safe, and generate returns that are certain while ensuring that the capital of the investor too is safe. The downside to these schemes is the longer duration of lock in period, during which there will be no liquidity for the investor.

There are certain fixed income schemes that also help to save tax; we recommend that everybody who plans their taxes should include these schemes in their portfolio as well. Apart from the safety of returns, these schemes promote efficiency towards saving of tax. While there are many fixed income schemes, we provide you with a list of the most common ones that will also help you to save tax.

PPF (Public Provident Fund): One of the more popular avenues for investment, the PPF scheme generates approximately 8% return on your investments. You can avail tax rebate under section 80C, up to Rs 1, 50,000. Apart from this the interest that is generated is also exempt from tax, making PPF one of the most favourable fixed income instruments as an investment avenue. PPF has a lock in period of 15 years when you open the account and can then be renewed in blocks of five years.

VPF (Voluntary Provident Fund): This is applicable for the salaried class. The salaried class can invest a maximum of hundred percent of their basic salary component and also the “Dearness Allowance” (DA). One can invest in VPF even if you have exhausted your investment under 80C and unlike the PF, it is not mandatory for the employer to put up an equal amount. One can avail the monies under EPF, when one retires or resigns from an organization.

NSC (National Savings Certificate): Another popular savings instrument, here too income tax rebate can be availed under section 80C, up to Rs 1, 50,000. Similar to PPF, the interest that is generated on NSC is also approximately 8%. The lock in period is for five years and if you wish for premature withdrawal, these can be availed under exceptional cases like the demise of the NSC holder or if the law provides an order via the courts. When NSC matures, the interest that is generated is clubbed with the investor’s income in that year and tax rates as per slabs are applicable.

SSY (Sukanya Samriddhi Yojana): This scheme is for your girl child. You are allowed to invest in this scheme for two girls who are under ten years of age. Once again you can claim tax exemption to the tune of Rs 1, 50,000 under section 80C. The interest rate for SSY is linked up with the yield of government bonds. The interest rate too is a variable and changes every quarter based on the government’s decision. As investors open this account for a girl child it is important to note that the monies that are obtained from this scheme needs to be used for the girl child’s expenses for marriage and education only.

SCSS (Senior Citizens Savings Scheme): As the nomenclature goes, this is applicable to people who are above 60 years of age. A total of Rs 15, 00,000 is the upper limit for investment in this scheme per person. The scheme matures after five years and an extension of another three years can be provided. This scheme generates decent returns thereby providing a regular source of fixed income to senior citizens. Under section 80C the senior citizen can claim tax exemption in a year up to Rs 1, 50,000. The age limit can only be reduced under the following conditions:

  • The person opts for voluntary retirement
  • The person does not opt for another job and remains jobless
  • If the person is in the armed forces of India

For early withdrawal, there is a penalty levied and any interest that is generated is taxable as per the applicable slab.

It is important to note that if the lock in period is broken then tax will be eligible on these instruments. It is also important to note that one can only invest up to Rs 1,50,000 per annum under section 80C combined for all the above mentioned instruments. For example if you have invested Rs 100,000 towards PPF and Rs 50,000 towards NSC, then any further investments in other instruments like Sukanya Samriddhi Yojana, or Senior Citizens scheme will be not be tax exempt.