If you like the safety of a steady predictable income, every month, quarter or year, then there are a number of tax-saving instruments available for you. In fact, most of the tax-saving paper you could buy earlier was in this category.
For those who are uncomfortable with fluctuating incomes that market-linked instruments give, these are the products for you.
Admittedly, returns from fixed income instruments averaging about 8 per cent a year, do not even compare with those from equity-related products that have returned over 40 per cent in the last few years. But then, the return you get is also market risk-free. At the end of every designated period, you know you will get a certain amount.
And that imparts stability to a portfolio. They are suitable for investors who need to cut down on the risk, such as people nearing retirement. For them, these could even form the mainstay of their portfolio. The choice you have is fairly wide. (See Table below: Fixed Income Tax Saving Options)
Vantage points
Three important things that one needs to look at before investing in any of the mentioned fixed income instruments are taxability of interest income, frequency of income, and tenure of investment. Even if the interest rate on the Senior Citizens' Savings Scheme (SCSS) is 9 per cent per annum, the income is fully taxable. This means that for someone in the highest tax-bracket, the actual return after-tax will be only 6.22 per cent.
Similarly, if your need is a regular monthly income, the instrument with the highest post-tax return, public provident fund, may not be the right choice. Only three of the fixed income instruments that qualify for relief under Section 80C give a regular stream of income. The SCSS pays interest quarterly, 5-year notified bank deposits half-yearly, and time deposits annually.
So, it appears that there is nothing for anyone who is looking for steady monthly income. But that is not quite correct, although you would have to get a little active about your investments in that case.
Rather than putting in a lump sum when the taxman is almost knocking on your door at the end of the financial year, you can invest throughout the year. That, de facto, will give you steady monthly or quarterly returns as the instruments mature in a phased manner.
So, you can invest and rest assured that your money is safe, although inflation can eat away at it quietly.
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Fixed Income Tax Saving Options | |||||
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Investment in all these instruments qualifies for Section 80C deduction and gives a guaranteed fixed income. Only endowment life insurance plans give bonus-based returns | |||||
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Instrument available |
Duration (yrs) |
Returns (%) |
Compounding |
Taxability of income |
Yieldª (%) |
|
Bank Fixed Deposit (Tax savers) |
5 |
8.50¹ |
Quarterly |
Interest taxable |
5.87 |
|
Employee Provident Fund |
Till retirement |
8.50² |
Yearly |
Tax-free |
12.30 |
|
Life Insurance (Endowment) |
10 and more |
Around 6.00³ |
Yearly |
Tax-free |
8.68 |
|
National Savings Certificate |
6 |
8.00 |
Half-yearly |
Interest taxable |
5.53 |
|
Post Office Time Deposits |
5 |
7.50 |
Quarterly |
Interest taxable |
5.18 |
|
Public Provident Fund |
15 |
8.00 |
Yearly |
Tax-free |
11.57 |
|
Senior Citizens' Savings Scheme |
5 |
9.00 |
Quarterly |
Interest taxable |
6.22 |
|
ª Applicable to 30% tax slab, including education cess | ¹ May vary from bank to bank | ² Fixed by govt each year | ³ Internal rate of return based on bonuses | |||||
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