Where can Indians living in the US invest?

I had a lengthy conversation with a friend who currently lives in the US, and wanted to start investing. We touched upon various options, and I thought it would be a good idea to do a quick post with the broad outlines of our conversation. We spoke about investing options at length but before you get to those, you should ponder on the following two questions:

  1. How do you save?
  2. Where will you eventually settle?

How do you save?

The first thing I asked her was how do you save? This might sound like a strange question but I’m a great believer of saving first, and spending later. If you don’t have a way to auto debit some money into your savings account, you should give it a try. Set a fixed amount every month or even every fortnight that automatically goes to your savings account or your brokerage account and forget about the money.

If you wait to invest only what’s left after spending you will miss out on several opportunities to save that you didn’t even know existed. Without saving, there is no investment, so thinking through a plan for savings is necessary in order to build any sort of wealth.

Where will you eventually settle?

For a lot of NRIs this is a difficult question – and in my experience if you don’t feel strongly about returning to India, I’d say assuming that you will stay in the US for a long time is a safe thing. This matters because you should have access to funds in the country you plan to stay, and there is no point of owning a house in India if you are never going to live in it. Better keep the bulk of your investments close to where you are.

Answering the two questions above will help you evaluate whether the options listed below are appropriate for you. With that said, here are some options that Indians living in the US can invest in.

1.  Real estate in India: If I were to do a poll of all my friends living in the US, I think the number one investment option that would come to the fore is real estate in India. There is hardly anyone who doesn’t own a plot or a flat somewhere in India, and at least on paper almost all of them have appreciated. This is perhaps the most popular investing option for Indians in US.

2. Real estate in US: I’m mentioning it here only to maintain continuity, as I feel buying real estate in the US as an investment is not as popular today as it was before the crash of 2008, but regardless, this is an option available to you.

3. Buying Gold Coins: Buying gold coins is a lot easier and efficient in the US than it is in India, as you can sell them easily later one without the fear of a jeweler screwing you out of your money, and that has been a popular investment also.

As you can perhaps tell, so far none of these are investment options that I recommended to my friend.

4. NRE Fixed Deposit Account in India: NRIs and Indians living in US can open a NRE fixed deposit account, and this is a good option if you think you will need money in India at some point. You will be able to get 8 or 9 percent tax free, and that’s a really good rate of return on a very low risk investment.

Now, a lot of people compare the 0 percent interest rate you get in the US to the 9 percent you get in India without considering the difference of inflation in the two countries, and without the effect of exchange rates. I sometimes see people transferring money to India and being unhappy with an exchange rate of Rs. 54 or Rs. 55 and these guys don’t realize that just a few years ago people were transferring money in 40s and sometimes even the late 30s. If you are going to need money in the US in a few years, and the INR depreciates even more then the difference in interest rates isn’t going to help you at all.

So, this is one thing to be careful about.

5. Buying stocks and mutual funds in India: NRIs can open a Demat account that is linked to their NRE or NRO account and then invest in some select stocks and mutual funds. That is one option for people who want to invest in the Indian market and are comfortable with equities.

6. Buying India based ETFs listed in the US: There are several ETFs that are listed in the US that invest in securities in India, and you can buy those if you want to get exposure to India. You can open a trading and brokerage account in the US even on a visa and then you can buy ETFs from that account.

7. Buy US based shares or Index Funds: This is not much different from the point above, just that instead of buying funds that have exposure to India, you now buy funds that have exposure to the US. You invest in equities in this too but the underlying is American instead of Indian shares. In the same vein, you can invest in shares that have an underlying in any economy in the world.

8. Buy US based bond funds: My friend wasn’t very comfortable with equities so I said that there are bond funds also that you can invest in. I am not sure how many Indians will do this given the low returns on these but as I said earlier, you can’t really compare this with INR returns as the inflation and exchange rate volatility is different.


I feel that the options are fairly limited and the lack of good debt options makes it so that people either invest in fixed deposits in India, or get used to equity.

My recommendation to her was to get used to equity and begin by opening a brokerage account in the US and buy index funds in small quantities. I suggested that she send some money to her brokerage account every fortnight, and then use half of that to buy one or two index funds. Let the rest lie there for when there is another panic, and then use that money to buy equities when they fall.

This is of course easier said than done and not everyone can do that. I think I’ll be able to help her do this and in a few years time frame, she will be completely bought into equities, and be able to use it to her advantage.

I will be keen to hear what others think of the options I listed out and which ones you think can be added, and what have you done that has worked for you.


Are pensions from insurance plans tax free in India?

I got the following email yesterday and it got me wondering about the tax liability of pensions in India.

Please advice about taxability of 80CCC pension policy so as to pay minimum tax. My policy is maturing and it is about Rs. 3000/- per month. Thanks.

Section 80CCC deals with the deduction in your taxable income when you pay insurance premiums and is a sub-limit under Section 80C. This has nothing to do with how your pension will be taxed, and as far as the pension money itself is concerned, you can forget about 80CCC.

In fact, there is no pension that’s tax free at all. If you get a pension from the government, private sector or through an insurance policy, that should be included as part of your income, and will be taxed based on your slab.

Even if you moved to another country and draw a pension in India – that will be taxed in India based on your tax slab. 

The only exception to this is when you get some part of your pension commuted. Commuted pension means that instead of drawing a monthly amount, you get a lumpsum at the time of retirement. You may commute some or all of your pension and you will be taxed according to two different set of rules. The un-commuted amount will be taxed based on your slab, and then the commuted part will be taxed based on where you were working.

If you were a government employee, then all of your commuted pension is tax free, but if you were not then there are certain rules that tell you how much you will be taxed on them. The CA Club has an excellent post on the taxability of pensions in India, and you can refer to that if you’re looking for details.

In order to reduce your tax liability you will have to make some tax deductible investments, as pension itself is taxable, and other than commuting it – you can do nothing to avoid the tax liability on it.

Is this the right time to buy gold?

Gold has had the worst day today in 30 years as it tumbled 8.7% in a single day. There are several things that you need to consider about gold, but before you read any further, you need to consider how bad my record with gold price predictions has been. I said that you should stay away from gold as early as March 2009 but if you had stayed away from gold for the last 4 years as I did that would have been bad for you as gold has grown quite a bit in that time.

GOLDBEES which is a popular Indian Gold ETF has grown almost 109% in the last 5 years, and at a CAGR of almost 16% that’s not bad at all.

2013 hasn’t been good for it though as it has gone down by 13.5% so far this calendar year, and it has gone down by 8% in the last 12 months or so, and it also looks like 2013 can be the first calendar year where gold returns could be negative when priced in INR.

I won’t be surprised by this and in fact if you read what I have written earlier it will be quite consistent with what I have been saying about gold over the past few years.

The main reason I’m not too bought into the gold theme is that every one is harping on the same story, and people are buying it because of all the same reasons. Everyone talks about central banks printing money, currencies getting debased and gold rising as a result. There is too much consensus and too many people talking the same language. That’s usually not a good sign, and portends bad days ahead. That’s what happened before when real estate stocks came down, same thing happened with infrastructure stocks, IT stocks, and perhaps even Tulips.

More than anything else this seems like a greater fool play where everyone is buying gold with the hope that someone else will be willing to buy it at a higher price a few months down the line. That has worked in the past, but I can’t see how that can work forever.

I’ve seen some very influential investors, and bloggers write about how they have the bulk of their portfolio in gold but I haven’t seen many updates from them to see what they are doing now that gold is trading down?

If you really had 40 – 50% of your portfolio in gold, you’re surely looking at tough times, and with the margin for gold and silver increased in the international markets, it should see some tough times going ahead as well.

I personally don’t feel that this is a good time to buy gold, and on the contrary, if you are sitting on big profits from your gold trade that has worked for the past few years, I’d say it is a good idea to book some of those profits, so that if the fall continues, not all of your profits are nullified.

Most importantly, view gold as any other asset, it’s not a hedge against inflation, and it is certainly not a safe haven, it’s just another asset that goes up and goes down, and if you have too much of your money tied into it – then you are well advised to diversify and reduce your exposure to it.

Also, I see some parallels here for the Indian real estate market. People say that real estate won’t go down because it has never gone down in the past, and guess where you have heard that argument before?

I probably don’t need to repeat this to regular readers, but it’s my duty to remind you that you shouldn’t take investment advice from random bloggers on the internet – your’s truly included.

Update on OneMint Stats

I share OneMint numbers with you from time to time, and usually I do that when the blog hits a milestone or some other small achievement like that.

However, today I’m going to share stats of perhaps the worst quarter OneMint has ever had. I track some numbers on OneMint quarterly, and since this is a financial blog, the last quarter of every financial year is usually the best as far as traffic is concerned.

OneMint was very close to hitting one million pageviews per quarter in 2012, and I was fairly confident that the one million a quarter mark will be hit in Q1 2013. However, this is what happened:

   2013 Jan – Mar Growth / Decline (’12 Jan – Mar)
Pageviews 447,520 -53.67%
Unique Visitors 287,693 -41.78%
Visits 336,772 -43.34%
Pages / Visit 1.42 -12.88%
Avg Time on Site 00:1:21 -17.35%
Bounce Rate 78.93% 17.44%
New Visits 82.11% 3.48%

As you can well imagine, I’m very disappointed with these numbers, and when a friend casually remarked that by next year OneMint won’t even be in existence, I got a small shock and thought that I should introspect and spend some time on why OneMint has done so badly in recent times.

I hope that writing this will also help other bloggers avoid some mistakes that I have committed.

With that in mind, here is what I think I did wrong that has led to OneMint’s recent decline.

1. Answered comments late: I have not been answering comments as regularly as I used to and this has definitely led to a decline in traffic. People don’t post as often, and the ones who were likely to post follow ups don’t do it when the comments are old, so not answering comments in a timely fashion has led to decline.

2. Did not post frequently enough: I don’t know of an easy way to calculate this but I’m pretty sure that I haven’t posted as much in 2012 as I did in 2011, and that definitely leads to decline in traffic – every new article results in traffic so it is natural that if you post less frequently your traffic will go down as well.

3. Did not strategize posts: Suggest a Topic has been a great page because of the discussion it generates but I usually don’t think about how popular that question is likely to be. Not every question interests a large segment of readers and many times I think that I haven’t used my time to the most optimal possible. Sometimes I write posts which are very narrow in scope and that takes away from writing about other things that are of interest to a wider audience and that is definitely a cause for lower traffic.

4. Did not update old posts: The main source of traffic for OneMint is Google Search, and older posts usually send more traffic. In the past I have updated older posts with more current data so that the posts still remain relevant and don’t lose their search engine rankings, but in the last year I haven’t been updating posts as regularly and as a result they are dropping out of search engine rankings, and losing their traffic.

5. Did not write difficult posts: Although I hate to admit it, I’ve been prone to write about topics that I already know about and that’s usually not good for traffic. You want to write about things that are difficult and explain them so that posts get shared, and do well in search rankings, writing easy stuff is easy but won’t generate traffic long term.

I can go on and on but I want to stop here, and hear from you on what you think might have been the reason for OneMint’s decline, and for those of you who also have blogs, I hope that you don’t commit the same mistakes that I have!

What is the difference between FDI and FII?

Vikas posted the following comment on the Suggest a Topic page a few days ago:

Vikas Ganjave March 30, 2013 at 9:13 am [edit]

Can you write an article on difference between FDI and FII citing examples?


A lot has been written on FDI (Foreign Direct Investment) and FII (Foreign Institutional Investor) already, and I found a great succinct explanation from Business Line explaining the difference between FDI and FII investments as one flowing into the stock market (FII) and the other flowing into the primary market (FDI), and all other differences emerging out of that one key point.

FDI (Foreign Direct Investment) is when a foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture, and conducting their business in India.

IBM India is a wholly owned subsidiary of IBM, and is a good example of FDI where a foreign company has set up a subsidiary in India and is conducting its business through that company. What’s amazing about IBM is that, it is now the largest Indian IT company in India. It is serving Indian customers, and a large domestic market that was not tapped by the Indian players themselves.

Foreign companies partnering with Indian companies to set up joint ventures is more typical and Starbucks partnering with Tata Global Beverages Limited is a recent example of FDI through joint venture, but there are several others in the insurance, telecom, food industry etc.

FII is when foreign investors invest in the shares of a company that is listed in India, or in bonds offered by an Indian company. So, if a foreign investor buys shares in Infosys then that qualifies as FII Investment.

It is easy to see why you would prefer FDI to FII investments. FDI investments are more stable because companies like IBM set up offices, hire employees, and have a long term plan for the country. IBM can’t just pull out a few million dollars from India overnight, which is what FII investors do from time to time and that leads to market crashes.

In India, attracting FII has been easier than FDI because of the policy uncertainty and procedural delays. An RBI study has the following para on FDI slowdown and it is easy to see how it is tied to the politics in the country.

“Procedural delays are bothering nearly all of the respondents with almost 93 percent of the respondents indicating this issue to be ‘quite to very serious’. The time consuming systems and procedures to be complied with, the bureaucratic layers to be dealt with and the multiple bodies from which clearances are to be obtained- all add up substantially to the transaction cost involved and take up a lot of management time thus making it an issue of serious concern for the investors” (FDI Survey by FICCI, December 2010).

Both FDI and FII investments are good for the economy, but I feel that FDI is where the focus should be and this is where India is lagging behind badly. There are several things that can be done to improve FDI investments, and hopefully, things will get done before India hits another crisis.

What is the difference between core inflation and headline inflation?

Mohit Golchha asked me what “core inflation” was a few weeks ago, and I thought this was an interesting topic that merits a post.

However, core inflation can only be understood in the overall context of inflation, and that’s why I have broadened the scope of this post.

When you see inflation numbers reported in the press – you usually hear about WPI (Wholesale Price Index) and CPI (Consumer Price Index) and then you also hear about core inflation and headline inflation.

In India, WPI is the number that’s widely followed and used to report inflation, and the headline inflation number refers to the WPI inflation number that’s reported every month. For example, you may see the following text in the newspapers: 

India’s headline inflation declined sharply to 6.62 percent in January from 7.18 percent in December – its slowest pace in three years – less than 7.0 percent predicted by the economists polled by Reuters.

The Wholesale Price Index (WPI) declined as the prices of fuel and manufactured items cooled moderately in December, compared to those in the previous month.

Usually, most references are to this number, although there is a contention that CPI is a better index for measuring inflation in India.  We won’t however get into that for the purpose of this post.

The Need for Core Inflation

Headline Inflation or WPI or CPI measures the cost of living in a country and tells us how expensive or cheap living in a country has become over the years and for this reason it has components weighted in more or less the same proportion you would expect to consume them.

The RBI creates monetary policy with a goal to achieve a certain target inflation rate, and the way monetary policy affects inflation is by influencing the aggregate demand in the economy.

Simply put, if RBI thinks the economy is over heated and there is high inflation then they will raise interest rates which will make it harder for people to buy things like cars and homes on a loan and that will lower the overall demand in the economy, and in turn it cool down inflation.

However, demand is not the only factor that causes inflation, there are supply side factors as well, specially factors like food and energy prices that are caused by international factors or temporary supply shocks that cause demand. RBI can’t use the headline inflation number alone to make their decisions because these include supply side factors also which are considered temporary and volatile in nature. Two examples of such supply side shocks are the drought in 2009 and the oil price hike of 2010.

To remove the effects of such factors, RBI and other central banks use another measure of inflation which is called “Core Inflation”. Core inflation only tracks those items that can be influenced by monetary policy, and removes the effect of other items.

In India, the measure for core inflation is WPI excluding primary articles, fuel groups and food items, and this index is called NFMI (Non Food Manufacturing Index). The NFMI consists of components that are 55% of the weight of the WPI and this link does a great job of explaining how to calculate the Non Food Manufacturing Index or India’ Core Inflation measure.

So, in conclusion, the idea behind core inflation is that you get an index that can serve you better in gauging the effect of monetary policy on inflation rates by removing the components that are volatile in nature and  are more prone to price rises due to supply side shocks.

Interest Rates on Post Office Small Saving Schemes – FY 2013-14

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Interest rates on most of the Post Office small saving schemes have been reduced by 10 basis points (bps) or 0.10% effective April 1, 2013. The change has become an annual exercise now and it gets announced in March every year. Here is the link to the statement issued by the finance ministry on Monday, March 25th.

Except 1-year time deposit, all other saving schemes will now carry 0.10% lower rate of interest. Your Public Provident Fund (PPF) account will now earn you 8.70% per annum tax-free rate of interest as against 8.80% earlier. 5-year and 10-year National Savings Certificates (NSC) will now carry interest rates of 8.50% and 8.80% per annum respectively, as against 8.60% and 8.90% now.

Post Office Monthly Income Scheme (POMIS) will also earn you lower at 8.40% vs. 8.50% earlier. The interest rate on Senior Citizens Savings Scheme (SCSS) also stands reduced to 9.20% as against 9.30%.

Here is the table having the interest rates applicable for FY 2012-13 and FY 2011-12:

Interest rate differential between PPF and Tax-Free Bonds

Tax-free bonds as a fixed income investment have become reasonably popular among investors now and since the interest income earned on both tax-free bonds and PPF is tax-free, most financial advisors/analysts compare these two instruments before recommending it to their clients.

Till financial year 2011-12, PPF was fetching 8.60% per annum which got increased to 8.80% per annum effective April 1, 2012 and at the same time, tax-free bonds were getting issued at 8.30% per annum. So, the interest rate differential was only 0.30% which made tax-free bonds a very attractive investment avenue for high net worth individuals (HNIs).

Now, the interest rates on tax-free bonds have fallen to approximately 7.50% per annum as compared to PPF which will now yield 8.70% effective April 1, 2013. This has increased the interest rate differential to 1.20% and hence makes PPF the best fixed income investment for most of the individual investors.

Honestly speaking, I was expecting the interest rate on PPF to fall below 8.50%. As an investor, it is a pleasant surprise to still get 8.70% on PPF but as an Indian and as an equity investor in Indian stock markets, I am disappointed as I think the interest rates have been set on a higher side and it is going to put one more strain on the finances of Indian government. It makes me think again if the government is still serious about containing its fiscal deficit or it wants to keep everybody silent one year before the elections, ignoring its already bad financial condition.

Corrections and clarifications on yesterday’s post about tax free and tax saving instruments

I got a few great comments and emails on yesterday’s post about tax free and tax saving instruments, and although I have made those changes in the post, I think they merit a post of their own. So in this post I’m going to write about some corrections, clarifications and inclusions that various readers suggested.


Income limit to avail RGESS benefit increased to Rs. 12 lakhs: Ashish Pandey wrote in pointing out that while the income limit to claim RGESS tax benefit was Rs. 10 lakh earlier, it has now been increased to Rs. 12 lakhs.

Post Office Monthly Income Scheme is not covered under 80C: Paresh pointed out that Post Office MIS is not covered u/s 80C. I have removed that from the list.

I apologize for these errors.


NPS: Sanmay pointed out that it will be more helpful to the readers if it were clarified that the NPS deduction was on your basic plus dearness allowance, actually over and above the limit of 80C, and was applicable to the amount contributed by the employers. To further explain, to calculate the upper limit on the deduction you should consider not only the basic salary, but the dearness allowance as well.

The money to be considered here is just the employer’s contribution to NPS, and that’s not limited by the Rs. 1 lakh upper limit of Section 80C.


Section 80TTA – Deduction on Savings Account: Krishna pointed out that a new section – 80TTA has been added since last year that makes interest on savings account deductible up to Rs. 10,000. This is only applicable for savings accounts and can’t be used for interest from fixed deposits. Sanmay added that you have to proactively get this deduction and get the bank to not deduct TDS on your interest.

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.

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

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.


  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.