An old quote reads as ‘Drink and be merry’. Today’s generation is wiser. They have changed the quote as ‘Drink and be merry using other’s money’. Finance companies are offering and approving instant loans to youngsters for small gadgets like smart phone. Youngsters do not bat an eye lid before buying the latest gadget under a loan scheme. Problem starts in case they are unable to make the payment. In case of non-payment of principal amount of loan, their Cibil score goes for a toss negating their chances for a future loan to buy a property from a bank or financial institution.
Credit Information Bureau India Limited (CIBIL) is one of the foremost credit bureaus licensed to operate by the Reserve Bank of India (RBI). CIBIL gathers and preserves records of an individual’s payments pertaining to credit cards and loans. Every month, member banks and credit institutions submit these records to CIBIL. Credit Information Reports (CIR) and credit scores are created using this information, which are provided to credit institutions to help evaluate and approve loan applications.
Reader will inquire as to why under the Investment module we are discussing about loans and CIBIL? Only to instill importance of ‘Investments’ in young minds. In 1950’s people were scared to take loans even for properties as they believed in saving and buying properties from their own funds. Today, blinded by social media and marketing by corporates, as soon as a person is employed, he splurges of materialistic things which were considered as luxury and that too on loan schemes marketed by Finance companies and banks. Investment is considered to be a passé’. “Don’t save for the rainy days, as winter will last for entire life’ they keep on saying.”
Investments are discussed from the point on view of Indian markets for easy reference. Investments can be bifurcated into the following
INCOME-TAX SAVINGS SCHEMES
OTHERS
Let’s discuss them one by one
INCOME-TAX SAVINGS SCHEMES
Tax savings schemes under Section 80C are as under
Equity Linked Savings Scheme (ELSS)-
These are tax-saving mutual funds that invest at least 65% of their assets in the stock markets. Investments of up to Rs 1.50 lakhs in ELSS funds can earn a tax break under Section 80C. The advantage of ELSS funds is that they come with the lowest lock-in among all tax-saving investments– just three years. Because of their equity exposure, ELSS funds are best placed to help you earn inflation-beating returns over the long-term. Even though these tax-saving mutual funds don’t offer guaranteed returns, the best performing ones have generated 12-15% returns over the long-term through the power of compounding interest. Additionally, since ELSS funds are equity-oriented funds, all gains on investments held for over one year are tax-free for the investor.
Public Provident Fund (PPF)
Deposits made in a PPF account are eligible for tax deductions under Section 80C. A maximum of Rs 1.50 lakhs can be claimed in one financial year. PPF gives guaranteed interest that is fixed by the Finance Ministry for every financial year. The current interest from the PPF is set at 7.10% that is compounded annually. (with effect from 1st October, 2020). The PPF has a tenure of 15 years, after which the withdrawals are tax-free. While the PPF doesn’t allow premature withdrawals, the account holder can take loans against the corpus in their PPF account.
Additionally, an employer’s contribution to the Employee Provident Fund (EPF) account also earns a tax break under Section 80C of up to Rs 1.50 lakhs.
Employee Provident Fund (EPF)
An employee’s contribution to the Employee Provident Fund (EPF) account also earns a tax break under Section 80C of up to Rs 1.50 lakhs. This amounts to 12% of salary that is deducted by an employer and deposited in the EPF or other recognised provident fund. The current interest rate on the EPF is 8.15%.
Tax-saving Fixed Deposits (FD)
Tax-saving FDs are like regular fixed deposits, but come with a lock-in period of 5 years and tax break under Section 80C on investments of up to Rs 1.50 lakhs. Different banks offer different interest on the tax-saving FDs, which range from 7.00-8.50%. The returns are guaranteed and the FDs offer 100% capital protection. The interest is added to the investor’s taxable income.
National Pension Scheme (NPS)
The NPS is a pension scheme that has been started by the Indian Government to allow the unorganised sector and working professionals to have a pension after retirement. Investments of up to Rs 1.50 lakhs can be used to avail tax deductions under Section 80C. An additional Rs 50,000 can also be invested in the NPS for tax deductions under Section 80CCD(1B). The NPS offers different plans that the subscriber can choose as per their risk profile. But the highest exposure to equity is capped at 75%. An option to change designated pension fund managers is also allowed. However, a major disadvantage of the NPS is that 60% of the proceeds upon maturity are taxable. Furthermore, there is no guarantee of the returns that can be earned from the NPS. However the NPS scorecard of all the fund managers are currently showing a handsome returns on investments made.
National Savings Certificates (NSC)
NSCs are eligible for tax breaks for the financial year in which they are purchased. Investments of up to Rs 1.50 lakhs in NSCs can be made to save taxes under Section 80C. NSCs can be bought from designated post offices and come with a lock-in period of 5 years. The interest is compounded annually but is taxable. Interest rate is 7.70%. (With effect from 1st April, 2023)
Unit Linked Insurance Plans (ULIP)
ULIPs are a mix of insurance and investment. A part of the invested amount in ULIPs is used to provide insurance and the rest of the amount is invested in the stock markets. Investments of up to Rs 1.50 lakhs in ULIPs are eligible for tax breaks under Section 80C. ULIPs don’t offer guaranteed returns because they are an equity market-linked product. The disadvantage of ULIPs is that they don’t offer clarity on where the investments are made and how much of the invested amount is deducted for commissions and expenses. Charges to maintain the funds are high giving a very low yield to the investor just looking for pure returns.
Sukanya Samriddhi Yojana
Deposits of up to Rs 1.50 lakhs can be added to a Sukanya Samriddhi Yojana account for tax saving under Section 80C. The current interest rate on Sukanya Samriddhi Yojana deposits has been set at 8.00%. (With effect from 1st April, 2023) Deposits in this scheme have to be made for a girl child by the parent or guardian. The interest is compounded annually and is fully exempt from tax. The receipts upon maturity are also tax-free. The Sukanya Samriddhi Yojana account matures 21 years after opening the account. A partial withdrawal of up to 50% of the previous year’s balance is allowed after the account holder turns 18.
Senior Citizens Savings Scheme (SCSS)
The SCSS is a scheme exclusively for anyone who is over 60 years old or someone over 55 who has opted for retirement. The scheme has a maturity period of 5 years (optional extension of 2 years with rate of interest prevalent on that date) and gives 8.20% per annum. (With effect from 1st April, 2023) Investments of up to Rs 1.50 lakhs in SCSS can be made to save taxes under Section 80C.
FEATURES OF POPULAR 80 C INVESTMENTS
| Investment | Risk Profile | Interest (Updated upto 31st March, 2018) | Guaranteed Returns | Lock-in Period |
| ELSS funds | Equity-related risk | 12-15% expected | No | 3 years |
| PPF | Risk-free | 7.10% | Yes | 15 years |
| NPS | Equity-related | Depends on the asset allocation between Equity and Debt- Range 8-15% | No | Till retirement |
| NSC | Risk-free | 7.70% | Yes | 5 years |
| FD | Risk-free | 7.00-8.00% expected | Yes | 5 years |
| ULIP | Equity-related risk | 7-8% expected | No | 5 years |
| Sukanya Samriddhi | Risk-free | 8.00% | Yes | 21 years |
| SCSS | Risk-free | 8.20% | Yes | 5 years |
Other investments under Section 80C that earn a tax break:
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5 year deposit scheme in post office
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Subscriptions of notified securities like NSS
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Sum paid to National Housing Bank’s Home Loan Account Scheme
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Contribution to notified LIC annuity plan
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Subscription to notified bonds of National Bank for Agriculture and Rural Development
Tax savings schemes to reduce or nullify tax liability on capital gains
- Buying residential house property on sale of residential property (Section 54) or sale of any other Long Term Capital asset (Section 54F)
Common requirements between the two Sections
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A new residential house property must be purchased or constructed to claim the exemption
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The new residential property must be purchased either 1 year before the sale or 2 years after the sale of the property/asset.
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Or the new residential house property must be constructed within 3 years of sale of the property/asset
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If one is not able to invest the specified amount in the manner stated above before the date of tax filing or 1 year from the date of sale, whichever is earlier, deposit the specified amount in a public sector bank (or other banks as per the Capital Gains Account Scheme, 1988).
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Subject to conditions two house properties can be purchased or constructed.
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This new residential property must be situated in India. The exemption shall not be available for properties bought or constructed outside India to claim this exemption.
Differences between these two Sections
| Section 54 | Section 54F |
| To claim full exemption the entire capital gains have to be invested. | To claim full exemption the entire sale receipts have to be invested. |
| In case entire capital gains are not invested – the amount not invested is charged to tax as long-term capital gains. | In case entire sale receipts are not invested, the exemption is allowed proportionately. [Exemption = Cost the new house x Capital Gains/Sale Receipts] |
| One should not own more than one residential house at the time of sale of the original asset. | |
| This exemption will be reversed if one sells this new property within 3 years of purchase and capital gains from sale of the new property will be taxed as short-term capital gains. | This exemption will be reversed if one sells this new property within 3 years of its purchase or construction OR if one purchases another residential house within 2 years of the sale of the original asset or construct a residential house other than the new house within 3 years of sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains. |
- Buy Bonds-
Four types of bonds are available to reduce or nullify the capital gains tax liability earned on sale of land or building or both and the same are as under:
Capital Gains bonds under Section 54EC –
Features are as under:
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Capital Gains Bond gives the exemption.
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The money invested in these bonds is also exempted from the capital gains tax.
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An annual interest rate ranging from of 5.00-5.25% is received that is less than the FD rates.
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Capital gains realized should be invested within 6 months of the date of transfer in eligible bonds.
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Such investment is held for 5 years and remains locked.
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To avail of capital gain exemption, the bonds cannot be transferred or converted into money; or any loan.
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Advance can be taken on security of such bond within 3 years from date of acquisition else, the benefit would be withdrawn.
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If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.
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The investment into the capital gains bond cannot go beyond Rs. 50 lakhs.
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You can invest in capital gains bonds of National Highway Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and Indian Railways Finance Corporation Limited (IRFC) through the designated branches of the banks.
Investment in specified fund Section 54EE:
Like the provision under section 54EC under which long term capital gains upto Rs 50 Lakhs can get tax exemption, the government has introduced a new provision named as section 54EE in the Finance Act, 2016 to provide exemption from capital gains tax if the long term capital gains proceeds are invested by an assessee in units of such specified fund, as may be notified by the Central Government in this behalf, subject to the condition that the amount remains invested for three years failing which the exemption shall be withdrawn. The investment in the units of the specified fund shall be allowed up to Rs. 50 lakh.
This specified fund shall be set up specifically for the startups in India.
OTHERS – Listed as below.
(Readers can seek answers, if required, from us and below list is not as per ranks assigned)
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Listed and Unlisted Equity Shares
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Exchange Traded Fund (ETF)
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Gold Exchange Traded Fund (Gold ETF)
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Mutual Funds
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Futures and Options
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Bonds
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Debentures
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Preference shares
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Precious metals like Gold and Silver
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Certified Diamonds
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Precious stones
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Commensurate coins
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Numismatic (Coins and bank notes)
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Philatelist (Stamps collection)
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Company and Bank Fixed deposits
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Art and art effects
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Properties
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Antiques – Furniture, Handicrafts and memorabilia
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