Fixed income instruments are typically meant for risk-averse investors who want safety of capital and assured returns. Along with these two aspects, schemes like the Public Provident Fund (PPF), National Savings Certificate (NSC), and Sukanya Samriddhi Yojana (SSY) etc., also provide tax-saving benefits under section 80C of Income Tax Act. PPF and SSY in fact, offer a higher degree of tax efficiency as returns from these schemes are completely tax-exempt.
Adhil Shetty, CEO, Bankbazaar.com says that fixed income investments should form a part of every investor’s portfolio to maintain stability, especially during economic volatility. “However, you should know that most long-term tax-saving debt investments have long lock-ins and, therefore, come with liquidity issues. Public Provident Fund and Sukanya Samriddhi Yojana come with lock-in periods of 15 years and 21 years, respectively, with only partial withdrawals available,” he said.
Public Provident Fund
Current interest rate offered: 8 percent
Contribution and tax saving investment limit: You can invest and claim deduction for investments up to Rs 1.5 lakh under section 80C of Income Tax Act in one financial year. The deposit of Rs 1.5 lakh can be completed in 12 instalments or less.
PPF is considered a safe investment avenue as it is a government-backed scheme. Currently, the investment, interest and maturity proceeds are fully exempt from tax. This makes PPF an EEE tax-saving avenue. New investors can open an account in a post office or any designated branch of a public sector bank that offers this investment avenue. Also, there are only a few private banks that offer the facility to invest in PPF through online route. The interest rate is reviewed and subject to change every quarter by the government.
Sukanya Samriddhi Yojana
Current interest rate offered: 8.5 percent
Contribution and tax saving investment limit: Contribution up to Rs 1.5 lakh can be made per account in a financial year. You can open one account each for a maximum of two girl children who should not be over 10 years of age at the time of opening of the account. You can claim deduction for investments in this scheme up to Rs 1.5 lakh only in a financial year under section 80C of the Income Tax Act. As such there is no cap on the number of deposits made either in a month or in a financial year.
So, if you have a daughter below the age of 10 years, then you can open a Sukanya Samriddhi Yojana. In this scheme, the interest rate is linked to the government bond yield. The scheme’s interest rate is also subject to change every quarter as per the government’s discretion. You should know that the account can only be opened in the name of a girl child and all the maturity proceeds are to be used for her education and marriage.
|Schemes||Lock in Period (year)||Current Interest rates (%)||Compounding frequency|
|Public Provident Fund||15||8||Annually|
|Sukanya Samriddhi Account Scheme||21||8.5||Annually|
|Senior Citizens Savings Scheme||5||8.7||Quarterly|
|Tax saving Bank Fixed Deposits||5||7-8.25||Quarterly|
|National Savings Certificate||5||8||Annually|
|Voluntary Provident Fund||Up to retirement or resignation & account closure* whichever is earlier.||8.65||Annually|
Interest rates as announced for quarter Jan-Mar 2019.
*Withdrawal and account closure on resignation is subject to conditions.
Voluntary Provident Fund
Current interest rate offered: 8.65 percent
Contribution and tax saving investment limit: A salaried individual can contribute a maximum of up to 100 percent of basic salary and DA (dearness allowance). But, you can only claim deduction for investments up to Rs 1.5 lakh in a financial year under section 80C of Income Tax Act. Therefore, if you have already exhausted your 80C limit via other investments or expenditures, for example EPF, kid’s tuition fees etc., then you may not be able to use the additional VPF contribution to save any more tax. Contribution to Voluntary Provident Fund (VPF) will help you save tax under section 80C only if the limit is not exhausted by other avenues.
VPF allows employees to voluntarily contribute to their PF over and beyond the mandatory contribution under EPF. However, the employer is not required to make a matching contribution to VPF as is required under EPF. VPF is also subject to similar lock-in conditions as EPF, i.e., up to retirement or resignation, whichever is earlier.
Mrin Agarwal, Founder of financial education company, Finsafe India says that VPF is a great investment for tax savings under section 80C as it gives a tax-free return. Further, the returns are risk-free since they are guaranteed by the government. The returns currently beat inflation which makes the product attractive, especially to conservative investors. “VPF provides you the dual benefit of being a tax saving and retirement planning tool and salaried employees should consider increasing allocation to VPF for tax saving,” she said.
Senior Citizens’ Saving Scheme
Current interest rate offered: 8.7 percent
Contribution and tax saving investment limit: A maximum of Rs 15 lakh is allowed as investment at any given point in time. A senior citizen can claim deduction for investments up to Rs 1.5 lakh in a financial year under section 80C of Income Tax Act.
The Senior Citizens’ Savings Scheme (SCSS) is a tax-saving option for those who are above the age of 60. However, where the investor has opted for voluntary retirement, they can start investing in the scheme at the age of 58. The Ministry of Finance, on October 3, 2017, notified that the minimum age limit for investing in SCSS for retired defence personnel is now fixed at 50 years. The scheme has a lock in of 5 years. And, if they want to extend the tenure further, they can extend it for another 3 years.
No partial withdrawal is permitted under these rules before the expiry of a period of five years from the date of opening of an account. However, in case of any emergency, an investor can pre-maturely close the account with a penalty levied on the withdrawal.
Tax-saving Bank Fixed Deposits
Current interest rate offered: 7-8.25 percent
Contribution and tax savings investment limit: According to websites of the State Bank of India, ICICI Bank and HDFC Bank, the maximum amount that can be deposited in these tax saving deposits is Rs 1.5 lakh for which you can claim deduction in a financial year under section 80C. The tax saving fixed deposits have a lock-in period of 5 years.
Fixed deposits are considered safer in terms of capital preservation and surety of returns as compared to equity investments when it comes to tax-saving. The scheme is a simple and convenient option for last minute tax savers. The interest rates on bank tax-saving FDs are decided by banks and are changed periodically.
National Saving Certificate
Current interest rate offered: 8 percent
Contribution and tax savings investment limit: There is no restriction on the amount of investment you can make in NSCs. But, you can only claim deduction for investments up to Rs 1.5 lakh in a financial year under section 80C of Income Tax Act.
Currently, 5 Years National Savings Certificate (NSC VIII Issue) is available for subscription. The interest rate is reviewed and subject to change every quarter by the government. Although interest earned from National Saving Certificate is taxable, the interest amount is deemed re-invested (except in the last year of the instrument’s tenure) as it is not paid back to the investor till maturity of the instrument. Hence, being re-invested, the interest component also qualifies for deduction under Section 80C of the income tax act.
Naveen Kukreja, CEO & Co-founder, Paisabazaar.com says, “The interest earned in the final year of the tenure is not deemed re-invested as the interest component for that year is paid back to the investor along with the principal component and accrued interest in the previous years.”
Interest rates on PPF and SSY are reviewed and subject to change quarterly by the government and the change in rates applies to existing accounts.
The interest rate for NSC and Senior Citizen Savings Scheme is also reviewed and re-fixed quarterly by the government, but the new rates are applicable only for new deposits, i.e., the interest rate for existing deposits remains the same. In case of VPF, the interest rate is fixed annually and is the same as that fixed for EPF accounts by the EPFO in consultation with the finance ministry.