Comprehensive List of All Tax Free and Tax Saving Investments in India for 2013

by Manshu on April 1, 2013

in Tax

With the budget announced last month, we now know the status of new and existing tax free and tax rebate investments for 2013-14, and in this post I’m going to try and list down each and every investment opportunity in India that gives you a tax benefit of some kind. If you find any missing, please leave a comment and I’ll update the post.

Before going through the individual investments, let’s take a look at the broad categories where they fall.

Tax Free Investments: Tax free investments are those investments where the income earned from them is not taxable. For example, the interest that you earn from a tax free bond is not taxable. There aren’t many such investment options available in India.

Tax Rebate or Tax Saving Investments: These are investments that reduce your tax liability by subtracting the sum you invest in them from your taxable income. As a result, the total tax incidence on you is reduced as your income on which tax is calculated is lowered.

Tax Arbitrage: In this section I’m going to list down some investments that don’t have any specified tax rebate or aren’t tax free otherwise but they offer a tax advantage against comparable investments.

Tax Free Investments

Public Provident Fund (PPF): This is the first thing that comes to mind when you talk about tax free investments. PPF is perhaps the best type of tax free investment because it allows you to reduce your tax liability when you invest in it, and then the returns are tax free as well. PPF has a lock in period of 15 years but you can take a loan against your money at 2% interest between the third and the sixth year. They also allow partial withdrawal from the sixth year onwards. The current interest rate is 8.70% compounded annually. .

Tax Free Bonds: Tax free bonds are a good investment for people in the higher tax bracket as they are issued by companies backed by the government so the risk is quite low, and the returns are quite decent when you consider the post tax yield. In the last two years they have been issued towards the end of the financial year, but you can also buy them from the stock exchange if you missed that window.

The benefit of buying them directly from the issuer is that they usually have what’s called a step down feature, which means that if you buy this bond from the stock market then you get a slightly reduced interest rate. These bonds can’t be more than the corresponding 10 year G-Sec yield, and since interest rates have been going downwards since last year, you can expect tax free bonds that will be issued in 2013-14 to have a slightly lower interest rate than the ones issued this year. This year, the interest rate on tax free bonds has hovered around the 7.50% mark for 10 years.

Maturity Proceeds of Life Insurance Policies: According to Section 10(10D) of the Income Tax Act 1961,  life insurance policy  proceeds are tax free as long as the sum assured is 10 times or more the premium paid. I’m generally not in favor of these policies because I feel that there are better options elsewhere if you invest your money in pure term life policies and mutual funds but as far as tax liability is concerned, these policies are tax free. LIC comes up with a few of these policies every year in the tax season so you can look at these at that time to understand them in detail.

Tax Rebate and Tax Saving Investments

Tax rebate investments are generally covered by Section 80C and allow you to reduce your tax liability by investing in instruments that reduce your taxable income. Here is a list of investment options that allow you a tax rebate in some form or the other.

1. Life Insurance Covered Under 80C: Life insurance schemes are covered under 80C and you can invest in them to get a tax benefit up to the limit of Rs. 1 lakh within 80C. The limit is applicable on the combined investment under 80C and not just insurance premiums.

2. Pension Premiums: Section 80CCC governs exemptions on insurance premiums paid on pension plans. This section comes under 80C and has a limit of Rs. 1 lakh. This means that to calculate how much of a deduction you will get you have to consider other investments made under 80C as well.

3. Health Insurance: Section 80D talks gives deductions to premiums paid on health insurance and nny amount paid by an Individual or HUF to an Insurance company as Medical Insurance Premium i.e. premium paid in respect of Mediclaim Policy can be claimed as deduction under section 80D up to a limit of Rs. 15,000 for an individual (Rs. 20,000 for senior citizen). Though not an investment, I’m including it here because I feel it will come up in comments.

4. National Savings Certificate: Investment in NSC is also covered under Section 80C and they currently fetch a rate of interest of 8.60%.

5. ELSS Funds: ELSS (Equity Linked Savings Scheme) mutual funds are funds that invest in shares, and they also give you a tax rebate. These funds have a lock in period of only 3 years which is the lowest of any investment covered under 80C. I feel ELSS funds are a good way to get started in equities because you get the tax saving and that itself makes the investment relatively safer than other equity investments. However, if you are not comfortable with the volatility of equity then this option is not for you.

6. RGESS: A new section called 80CCG was introduced and RGESS funds are covered under that. They are funds that can invest in a specified set of companies in India, and investing in them also reduces your tax liability. They can only be used by first time equity investors, and your income should be less than Rs. 12 lakhs to be eligible under this scheme. The unfortunate part about them is that the way they have been structured, you can only get a maximum tax benefit of Rs. 5,000 and you have to go through a lot of trouble to do that. I think this is a good option for those people who were going to invest in these type of shares anyway, but just the tax benefit of this is not enough incentive for you to buy these.

 7. Tax Savings Fixed Deposits: These are just like regular fixed deposits but they come with a lock in period of 5 years, and are covered under section 80C. Investing in them saves taxes as well. They usually have comparable interest rate to other fixed deposits of similar time frame, and can be a good option if you are looking for a safe hassle free investment.

8. Deduction of up to Rs. 10,000 on Savings Account: In the last budget, section 80TTA was introduced which allows you to deduct up to Rs. 10,000 earned from your savings account. You can’t use this for income earned from fixed deposits so you may say that this is not strictly a tax saving investment option, but if you do have earnings from a savings account, use this section to claim tax benefit. As Sanmay points out below, an important thing to remember about this is that you have to proactively claim this deduction as the bank will deduct TDS on your interest unless you instruct them not to.

9. ULIPS: ULIPS are also tax saving instruments as they fall reduce your taxable income as well.

10. NPS: There is a new section called 80CCD(2) under which an employer can put up to 10% of the employee’s basic salary plus dearness allowance in NPS and that becomes tax deductible. This is over and above the amount available for deduction under 80C. Now, the key thing to remember here is that there are two parts to the contribution towards NPS, and what you contribute will still fall under the 80C limit, but what your employer contributes is outside of that.

All the uncertainty and changes around NPS has ensured that people aren’t very comfortable investing in it. The vast majority of people who currently invest in NPS are those who don’t have a way to opt out of it. I don’t feel comfortable recommending this to anyone right now but if you are invested in it then might as well take advantage of the tax benefit.

11. EPF (Employees Provident Fund): EPF is covered under 80C so you save tax there and then the interest is tax free as well. Most of you would already have certain contributions to EPF as a large majority of readers here are salaried individuals, and if you have made contributions to EPF then make sure you get the 80C tax benefit from these as well.

12. SCSS (Senior Citizen’s Savings Scheme): SCSS is run by the post office and is meant for people over 60 or over 55 if they have taken VRS. It currently gives you an interest rate of 9.30% and is covered under Section 80C as well.   

Tax Arbitrage Investments

1. FMPs: FMP (Fixed Maturity Plans) are close ended mutual funds which invest in debt instruments. You can invest in these for more than a year and be taxed according to long term capital gains rate. The benefit of these are that their returns are comparable to fixed deposits but the income from fixed deposits gets added to your other income and you are taxed at your regular income tax slab.  In this scenario, if you fall under the 30% slab then investing in FMPs can give you comparable returns but the tax is at a lower bracket.

2. Liquid Funds as Opposed to Savings Bank Account: Tushar brought this up and I am not sure if this will strictly qualify as a tax arbitrage option or not, but regardless, it is a useful thing to keep in mind, and in the existing high interest rate environment they become a viable alternate to savings account in some cases. Vidya Bala has a detailed post on liquid funds that I found quite instructive.

I can’t think of any other tax arbitrage investments but if you know one please do leave a comment and I’ll include it.

Looking at investments from a tax point of view is a double edged sword. You want to think about taxability and plan based on it so that you can maximize your returns but at the same time you don’t want taxability to become the driving force behind your investment decisions to such an extent that you ignore everything else.

Edits:

  1. Ashish Pandey pointed out that the upper income limit to qualify for RGESS is now Rs. 12 lakhs instead of Rs. 10 lakhs. 
  2. Paresh pointed out that Post Office MIS does not qualify for 80C deduction so I have removed that from the list.
  3. Krishna pointed out that I had missed the newly added Section 80TTA so I have added that.
  4. Sanmay pointed out clarifying NPS and a useful tip for claiming savings tax deduction.
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{ 21 comments… read them below or add one }

Paresh April 1, 2013 at 9:48 am

List is great..I think just need is to check Postal MIS for 80C benefit.

Reply

Manshu April 1, 2013 at 8:27 pm

Thank you for pointing this out. I think I have made a mistake and included this incorrectly. I will check further and update the post. Thanks.

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Tushar April 1, 2013 at 5:01 pm

Liquid Funds with Daily Dividend options are good arbitrage instruments in a high interest rate regime and can also be good alternatives to bank deposits. Not sure if they fit your definition, but returns post tax are good around 7-8%

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Manshu April 1, 2013 at 7:50 pm

I didn’t think of this point Tushar so thanks for bringing it up and I think it is worth mentioning here. I’ll update the post.

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Krishna April 1, 2013 at 6:11 pm

I think you missed out Section 80 TTA, which was introduced in last year’s budget.

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Manshu April 1, 2013 at 7:44 pm

That’s a good point Krishna, I’ll add that.

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Sanmay April 1, 2013 at 7:30 pm

1) In regards to NPS, if you can make it a bit more clearer for the reader in your post, tax deduction on contribution up to 10 per cent of basic salary and dearness allowance (DA) made by an employer towards the NPS account of an employee under Section 80CCE.

***This is over and above the Rs 1 lakh limit under section 80C and is available if the contribution comes through the employer. This is exclusive to NPS.***

Returns of NPS for previous years can be seen at http://www.hdfcsec.com/data/docs/Performance%20PFM_NPSTierI.pdf

2) As Krishna rightfully mentioned, add Section 80 TTA. Also a point of this, the individual has to proactively claim this deduction in his returns as banks automatically deduct TDS.

I really miss the Rs. 20,000 infrastructure bond benefit under Section 80CCF given that interest on tax-free bonds has now significantly come down.

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Manshu April 1, 2013 at 7:42 pm

Thanks Sanmay, I’ll edit the NPS section to make it clearer.

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Rahul April 2, 2013 at 9:06 pm

Hope you find the following info useful:

Health Insurance – You can also mention about the Rs. 5,000/- sub-limit for preventive health checkup subject to overall limit of Rs. 15,000/-.

NSC Int Rate – 10 Year NSC is 8.8% & 5 Year NSC is 8.5% w.e.f. from 01.04.2013

SCSS Int Rate – It is 9.2% w.e.f. from 01.04.2013

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Anil Kuppa April 3, 2013 at 9:52 am

Hi Manshu,
I have a question regarding FMPs. What is the difference between FMPs and debt funds if I invest in more than 1 year? Both the funds would enjoy double indexation and the returns would be taxed at long term capital gains.

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Manshu April 9, 2013 at 6:14 am

From a taxation perspective, they are the same, and the difference is between what they own. However, this is a good point, and I don’t know for sure if there is a distinct advantage in holding FMPs as opposed to just a debt fund.

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Anil Kuppa April 9, 2013 at 11:41 am

Hi Manshu,
From what I understand, the only difference is between the fund which you’ve already pointed. While FMP states the term of the plan (e.g. 380 days or 2 yrs) etc., debt funds do not have any term.
Every debt fund such as ultrashort debt fund or short term debt fund invests in a different periods of maturity.
In my case, if I don’t have any plans to withdraw and would know for sure that I am not going to withdraw after 2 years I would invest in long term debt fund. The long term debt fund fetches much higher returns than a normal FD.

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Anil Kuppa April 9, 2013 at 11:43 am

One of the reasons why FMP is better than debt funds is the money is automatically withdrawn , that is, the money is automatically credited into your bank account. This way, it is easy to calculate the long term capital gains and requires less effort for an investor

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Manshu April 14, 2013 at 7:56 pm

Thank you.

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Aditya Veera June 18, 2013 at 10:26 pm

Surely there is a difference. Debt funds must redeem their holdings to fund redemptions of investors. So the tax burden falls on everybody – not just the early redeemers. FMPs cannot be redeemed before maturity. Plus, the portfolio turnover is lower which means a lower expense ratio. Finally, the duration is certain for FMPs, so the fund manager doesn’t really have too much to worry about in terms of picking different bonds etc. or managing interest rate risk. Again, reduces expenses. This is all logic – I welcome other investors to correct me if the evidence points otherwise. Anybody know the overall category returns of FMP vs. long-term / dynamic bond funds?

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Dev April 13, 2013 at 12:06 am

Hi Manshu… Are we missing 80CCF ? I am not sure… but there were speculations that government will reintroduce it in this Financial year…

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Manshu April 14, 2013 at 7:30 pm

Hi Dev,

80CCF has not been reintroduced, they decided to continue tax free bonds but didn’t reintroduce 80CCF.

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Velusamy April 16, 2013 at 6:35 pm

Hi,
Could you update this post with preventive health check up under section 80D ?

Velu

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Manshu April 16, 2013 at 8:54 pm

That is not an investment Velu, so I don’t think that should be here.

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Atul Kulkarni August 6, 2013 at 6:31 pm

Hey
Thanks for such and informative and most importantly easy descripton of the subject. Has really been helpful.
Hope to read more from you

Reply

raj August 31, 2014 at 3:05 pm

i want 50000 invest.for incometax save 2014-15. me kha pr rupees jma kru

Reply

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