Best ways to save tax in 2017
So many options, so little time. If you have still not completed your tax planning for 2016-17, don't panic. ET Wealth has identified the five best taxsaving options for 2017. We assessed the options on eight key parameters--returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income. Each parameter was given equal weightage and composite scores were worked out for the options.
For many investors, ease of investing is paramount as they don't have much time. Fixed deposits score very high on this front. A few clicks and your investment is done. Insurance agents also make the process easy by doing the paperwork. The investor just signs on the dotted line. But the cost of this ease is high. In the 30% tax bracket, the post-tax returns from fixed deposits are less than 5%. And traditional life insurance plans not only offer niggardly returns, but force buyers to continue till maturity .
Investors who are ready to make a little effort will find it very rewarding.Investing in ELSS funds has now become very easy with the launch of the e-KYC facility. The whole process does not take more than 30-35 minutes. The Pension Fund Regulatory and Development Authority has also made NPS investing completely paperless. Ulips can also be bought online with ease.
The great returns they have generated in the past and their enormous potential places ELSS funds at the top of the list.The category has generated 18.69% annualised returns in the past three years and 17.46% in the past five years. ELSS funds also score high on costs, transparency, taxability and liquidity. There is no entry load and the investor is charged 2.5-2.75% a year (direct plans charge less). Mutual funds are very well regu lated and charges, portfolios and transactions are in the public domain. Returns are tax free because long-term capital gains from equity funds are exempt. These funds have the shortest lock-in period of three years.
As we have often said, SIPs are the best way to invest in equity funds. However, given that we are already in the last quarter, you may not be able to invest in ELSS through SIPs now. Still, split your investment into three tranches and invest before 31 March.
The NPS is a great way to save tax if you don't mind locking in your money till you retire. Till last year, taxability of the NPS was a big issue. But the last Budget changed the rules and made 40% of the corpus tax free. The PFRDA wants the balance 60% to be tax exempt as well."The emphasis is on increasing pension coverage. So, allowing EEE status (to NPS) is our major demand," says PFRDA Chairman Hemant Contractor.
NPS is especially useful for investors who may have exhausted the `1.5 lakh investment limit under Section 80C but want to save more. They can cut their tax further if they put `50,000 in the pension scheme.
Ulips is still a four-letter word for many investors. But the new online Ulips are very different from the pre2010 policies. The new Ulips have very low costs, which leaves a lot on the table for the buyer. According to Morningstar, aggressive Ulip plans have earned almost 12% annualised returns in the past five years (see table). However, these numbers only indicate the rise in the NAV. Some Ulip charges are levied by cancelling units, so the actual returns are likely to be lower. Even so, the ease of online access has made these plans attractive and user friendly. Being insurance policies, income from these plans is tax free under Section 10(10D). If you switch your corpus from debt to equity and back to debt, the gains will not be taxed.You can park short-term money in liquid funds of your Ulip using the top-up facility.
Despite these advantages, Ulips continue to be in the doghouse. It is time for investors to assess these plans afresh, without being influenced by the chequered history of the category.
VPF AND PPF
The Provident Fund (PF) can also be a great way to save tax. Although an individual's contribution to the PF is linked to the salary, one can increase the amount by opting for the Voluntary Provident Fund (VPF). For investors not covered by the PF, the Public Provident Fund (PPF) can be a suitable alternative. The interest rate is lower at 8%, but remains ahead of inflation.
SENIOR CITIZEN'S SAVING SCHEME
Even though ELSS funds can offer terrific returns, senior citizens above 65-70 should steer clear of them. For them, the Senior Citizens' Savings Scheme is the best tax-saving option. It offers 8.5% returns and the interest is paid out every quarter. The payment dates are the same for all investors, irrespective of when they joined. It is a five-year scheme, and can be extended for a period of three years once it matures.