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Lock-in
Period
Pre-Tax
Returns
Tax Applicable
ELSS
3 Years
14-16%
No tax
5 Year Bank
FD
5 Years
9.50%
Interest is taxable
PPF
15 Years
8.50%
No tax
NSC
5 or 10 Years
8.50%
Interest is taxable
Life Insurance
5 Years
0-6%
No tax
Based on your risk appetite and expected returns, you can choose a product thats best
suited for your situation.
What does Scripbox recommend?
ELSS Mutual Funds For people who want superior returns and also have higher risk appetite
PPF For people who want returns at par with inflation and have very low risk appetite
YourPPF investments earns interest at a rate announced every year currently 8.7%.
PPF return is therefore mostly at par with inflation. However, it is tax-free and you can
do a lump sum or small regular investments.
The duration of a PPF account is 15 years which is extendable by 5 years at a time. You
cannot withdraw money from your PPF account except under certain conditions but not
before 5 years.
You can invest in PPF through a bank or Post Office. Ability to invest online is limited.
5 Year Bank FDs
This is a variant of the regular Bank FD with a 5 year lock in. They offer slightly higher
interest rates compared to normal FDs (0.25-0.5% higher) but does not offer liquidity
option- even premature withdrawal with penalty is not possible.
The amount you can invest is limited to Rs 1,50,000. The interest you earn on your 5
year bank FD is fully-taxable and you will have to pay taxes on a yearly basis for the
interest you earn for that period. TDS typically collected by banks is only 10% (20% in
case you have not submitted your PAN) and if you happen to be in the 20 or 30% tax
bracket, you need to pay the remaining interest while filing your IT returns.
Post-tax, 5 year bank FDs are not particularly attractive- especially for people in the 20
and 30% tax brackets since the post-tax returns (6-7%) are typically lower than other tax
saving investment options.
National Savings Certificate (NSC)
NSC interest rates are fixed in April every year. The current rate is 8.5% for 5 year lockin NSCs, and 8.8% for 10 year lock-in NSCs.
The interest accumulated is fully taxable. However, one key difference here is that the
interest amount is not paid out to the investor. Instead, its re-invested in NSC and
therefore can be considered as your investment in NSC for the subsequent year.
Needless to say, this is complex.
Investments up toRs 150,000 are eligible. You can invest in NSC via your local post
office.
Life InsurancePremium
This was almost the default tax saving option for years However, over the last few years,
most informed investors have learnt the perils of choosing this option
There are 2 kinds of Life Insurance Policies:
Pure risk also called term life which ensure a risk to the life of the insured
While pure risk life insurance is something everyone with a dependant must have, its
not an investment. Life insurance is an expense- something you pay to ensure that your
dependents are not left stranded should something unfortunate happen to you. Term life
insurance is cheap and for a sum of about Rs 10000, you can purchase a cover of Rs 1
Cr
The returns from and costs of investment oriented insurance policies are not transparent
and usually not attractive. We wont go into length on this topic but suffice to say that
you should not consider Life Insurance as a tax saving investment option.
National Pension Scheme
National Pension Scheme is a lot like investing in mutual funds with its Safe, moderate
and Risky options. The returns are not guaranteed.
You cannot withdraw until 60 and the corpus amount must necessarily be invested in an
Annuity. The withdrawals are also taxable.
Contributions up toRs 150,000 are eligible for deduction under Sec 80C. You can invest
via the specified list of NPS fund managers with points of presence operated through
banks.
However, given the restrictions that come with NPS, its not a recommended option.
Pension Funds
Pension funds are designed to provide you an income stream post retirement. They
come in two flavours: Deferred Annuity and Immediate Annuity.
For deferred annuity plan, you invest annually until your retirement. Once you reach your
retirement, you have can withdraw up to 60% of your accumulated corpus and have to
re-invest the remaining in an annuity fund which will give you a monthly pension.
When it comes to immediate annuity plans, you invest a bulk amount one-time and get
monthly pension from the next month itself. You would typically use these to invest your
retirement corpus.
Pension funds are not very popular because of the sub-par returns (around 6%) that
they give and the restriction they come with. Thats less than Indias inflation rate and
not even half of what ELSS funds provide in the long run.
Pension funds are offered by a number of providers. Contributions up toRs 150,000 are
eligible for deduction.
Senior citizens savings scheme
The senior citizens savings scheme is a product aimed at senior citizens to save tax. It
can only be opened by people who are above 60 years old.
There is a maximum cap of 15 lakhs and a lock-in period of 5 years. You may withdraw
the money before subject to penalty as follows
More than 1 year but less than 2 years 1.5% of deposit amount
This scheme is offered via the post office. Investments up toRs 150,000 are eligible.
EPF (Employee Provident Fund)
For salaried employees, this is not necessarily an optional thing. You will need to follow
your companys policy with some leeway available. However, a lot of people forget that
the amount contributed to EPF is also eligible for 80C deduction.
EPF is typically deducted from your salary every month and it includes 12% of your
Basic salary + DA up to a maximum limit of INR 6500 per month (inclusive of the
optional matching employer contribution).
You can withdraw EPF when you change jobs. However, your accrued amount will be
taxed as other income. If you withdraw EPF after 5 years, you do not attract any tax.
Withdrawal after 5 years is based on qualifying criteria.
The interest rate varies every year (for e.g. interest rate in 2010-11, was 9.5%, while in
the previous five years it was 8.5%). For 2014-15, the interest rate is fixed at 8.5%.
Other Tax Saving Investments & Expenses
Apart from voluntary contributions we make, there might be some forced savings/
expenses that already qualify for tax saving.
Tuition Fees for Children: Tuition fees for up to 2 children are covered under section
80C. Please note that it convers tuition fees only and not development fees or
donations.
Home Loan Principal Repayment: You are eligible for tax exemption for the repayment
you make towards your home loan principal. Do note that the interest component is not
eligible for tax benefits.
The scripbox recommended portfolio of tax saving ELSS funds will help you invest in the
ELSS funds with the best prospects and also provide you the convenience of online
investing and tracking.
Please note that this article does not attempt to be a comprehensive tax saving guide,
only a listing of the most common alternatives. Other alternatives include Infrastructure
bonds, PO deposits etc. Its also recommended that you get proper tax advice for your
situation.
Did you know you could balance short term losses against long term capital gains? Short term capital losses such as
that incurred from investing in stocks can be set against long term capital gains like that gained from debt funds or
sale property.
For instance, youve paid off the home loan and sold the property for a profit of Rs. 40 lakh. At 25%, the amount of tax
payable is Rs 10 lakh. In the same year, however, if you have sold stocks at a short term loss of Rs. 4 lakh, then your
taxable amount will be Rs. 36 lakh.
Proof Required Ensure you keep the statement of your trading account, including the details of transactions for
which you have incurred losses.
#2: Learn More to Save on Educational Expenses
Increasing cost of education is a major concern for parents. In the case of education, the taxman is relatively
favorable.
Under Section 80C and 80E, interest on educational loans for children as well as spouses (excluding relatives and
siblings) is deductible from taxable income for the first eight years.
Proof Required For claims on interest paid on education loans, you need to present your loan account statement
as proof.
#3: Lighten the weight of medical expenses on illness of dependants
The taxman understands that in circumstances where a dependent is chronically ill, medical expenses can weigh
down taxpayers. Therefore, under Section 80DDB, an annual deduction of INR 40,000 or INR 60,000 for senior
citizen dependents can be claimed.
Deductions can be claimed on only certain diseases, some of which include, advanced stage of AIDS, hematological
disorders such as hemophilia, neurological diseases such as Parkinsons, dementia, chorea, and chronic kidney
failure.
To be eligible for a claim, dependents (parents, children, spouses and siblings) should not have claimed for deduction
separately.
Proof Required For claims on medical expenses on illness of dependants, you need a medical certificate and
details of the illness from a certified medical professional in a government hospital.
#4: Politicians are not the only ones to gain Benefit from deduction on political contributions and charitable
donations
Being socially responsible and politically inclined seems to be the current trend. Whether you contribute to a
recognized political party, volunteer to donate money to a NGO or charitable organization, you are eligible for a tax
deduction.
Under Section 80GGC (80GGB for corporates), donations to registered political parties (excluding contributions to
individual) or electoral trusts can be entitled for a deduction. A fascinating point to note is that there is no upper limit
on the amount that can be claimed as a deduction.
Under Section 80G, 100% or 50% of your donation to a charitable organization and up to 10% of your income is
entitled for deduction.
Proof Required For claims on contributions to political parties, you need a stamped receipt from the party or trust.
For claims on donations made to charitable organizations, a tax exemption certificate or receipt is required.
Remember: Its not about avoiding taxes. Its all about reducing your tax liability
They are open-ended equity mutual funds that are eligible for tax deductions under Section 80C of the Indian Income
Tax Act. They have the dual advantage of growing your wealth in addition to saving tax.
ELSS funds provide the best combination of
Lowest lock in period (only 3 years) among all 80C investments and
Like all equity funds, the returns on ELSS funds are not guaranteed but this is the historical average for long
term investments in ELSS funds.
How to invest in ELSS funds?
At Scripbox, using our scientific algorithm, we carefully select ELSS funds with the best long term prospects for you.
ELSS funds potentially give you inflation beating returns (14-16% historical long term average), which help you grow
your wealth in addition to saving tax.
We keep hearing the refrain that equities in the last few years havent
even kept up with FDs. There are two fallacies here:
1. Equity return over the last 30 years has been about 16%, despite a flat market for the past 5 years. Well managed
mutual funds have delivered even better.
2. Equity and debt are taxed differently and that makes a big difference. There is no income tax on equity held for a
year or longer whereas debt attracts income tax at normal rates. On a post tax basis the FD return (or any debt
investment for that matter) is lower by 10-30% depending on your tax bracket.
So heres how the two alternatives measure up historically :
Equity: 16% annualised return with no income tax
FD: 9% annual return, fully taxed
This is not a pitch for investing in equity. Understanding the tax impact for the choice of investment is important in
your decision.
While it influences the economy it also affects the investors. It tells investors exactly how much of a return their
investments need to make for them to maintain their standard of living. For example if a certain stock returned 4%
and inflation was 5%, then the real return on investment would be minus 1% (5%-4%). In India the inflation rate
averaged 8.98 percent from 2012 until 2014.
Compounding
Generating earnings from previous earnings is referred to as compounding. In Scripbox terms, making your money
work hard.
For example, lets say you invested INR 10,000 and it earned an interest if INR 1000 in the first year. Now, for the
second year, if you dont make any more investments and assuming the interest rate remains the same at 10%, you
will generate an interest amount of INR 1100 for second year. The interest earned in the first year, generated
additional interest in the second year. This way, your money keeps on growing until withdrawn. This is called
compounding. It is one of the fundamental ways to build wealth.
Related reading
Why I Will Always Have Less Money Than Abhay!
Interest Rate (Floating, Fixed, and Reducing)
An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from lenders.
A fixed interest rate stays constant throughout the duration of the loan however.
A floating interest rate is based on a base rate which is controlled by the RBI and can change over the duration of the
loan. Floating interest rates can affect your interest payable and could increase/decrease your monthly instalment
amount.
A reducing or diminishing interest rate is calculated on the outstanding loan balance every month. Interest Payable
per Installment = Interest Rate per Installment * Remaining Loan Amount.
Time value of money
Time value of money is a concept based on the idea that the value of money available at the present time is worth
more than the same amount in the future.
For example, INR 100 invested today for one year at a 5% interest rate will be worth INR 105 in the next year,
therefore, INR 100 paid now and INR 105 paid one year later have exactly the same value.
Related Reading
The Riskiness Of Cash
Market volatility
Volatility refers to the amount of uncertainty or fluctuation in the value of an investment. In other words, volatility refers
to the amount of uncertainty or risk about the size of changes in a securitys value.
It is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by
calculating the standard deviation of the annualized returns over a given period of time.
Asset allocation
It is an investment strategy which aims to balance risk and reward. In other words, it is the process of deciding the
proportion of your portfolio dedicated to various assets based on your goals, risk tolerance, and time sphere.
The three major asset classes include equity, real estate, and fixed income. Each of these classes reacts differently to
different economic conditions. Hence it is wise to diversify your portfolio and spread your investments across multiple
asset classes.
Recommended related reading
Net worth
The difference between your assets and liabilities is referred to as net worth. You can calculate your overall financial
health by adding up all of the money and investments and subtracting all the debt from the grand total. The resulting
amount is your net worth.
Credit Score
Credit score is a numeric representation of a persons credit files and defines a persons creditworthiness. It is used
by lenders to assess whether the person will be able to clear off his debts.
Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The score
ranges from 300 to 850 the higher the number, the more creditworthy the person is deemed to be.
Capital gains
The increase in the value of an asset or investment, like a stock or real estate, above its original purchase price is
called a capital gain.
Rebalancing
Rebalancing involves buying or selling assets periodically to maintain your desired asset allocation.
For example, if your target allocation is 60% stocks, 20% bonds and 20% cash, and the stock market has performed
particularly well over the past year, your allocation may now have shifted to 70% stocks, 10% bonds and 20% cash.
To rebalance your portfolio, you could sell some of your stocks and reinvest the amount in bonds and rebalance your
portfolio.
Related Reading
Rebalancing The Secret to Long Term Investing Success with Scripbox
Stocks
Stocks are a type of investment or security which gives you part-ownership in a company. Also referred to as shares
or equity, stocks give you a claim on part of the companys assets and earnings. The more stocks you own, the higher
is your ownership stake in the company.
There are two types of stocks, common and preferred. A common stockholder can vote at shareholders meetings and
receive dividends. Preferred stockholders have a higher claim on assets and earnings than owners of common stock
but do not have any voting rights.
Bonds
A bond is a debt investment or a loan issued to a corporate or governmental entity for the purpose of raising capital. A
bond is a promise to repay the principal along with the fixed interest for a defined period of time. Some bonds do not
pay interest, but all bonds require a repayment of principal.
Related Reading
Why Debt Mutual Funds Are An Excellent Alternative To Fixed Deposits?
Equity
An equity investment generally refers to the buying and holding of shares of stock in anticipation of income from
dividends and capital gains. However, in the context of real estate, it is the difference between the current market
value of the property and the amount the owner still owes on the mortgage. In other words, it is the difference
between the current value of the property and the amount that the owner owes against it.
Related Reading
Why Invest in Equities?
Term Insurance
Term insurance is a traditional form of life insurance which offers life coverage for a specified duration of time or a
specified term of years. Term insurance provides only insurance cover and does not offer money back on maturity.
Available for a range of 10-30 years, term insurance is the cheapest and most recommended type of life insurance
policy.
Premium for Life Insurance
A premium is an amount to be paid periodically for a contract of insurance. The premium amount is calculated based
on several parameters like age, type of employment, medical condition of the insured person, etc. The premium
amount can be paid in monthly, quarterly or annually for a defined period of time.