Tax Planning Options for Conservative Investors



[Tax Planning Series]

Session 3: Tax Planning Options For Conservative Investors


We are glad to have you with us for our 3rd Session on Tax Planning – and that is ‘Tax Planning Options for Conservative Investors’


In the last session of money simplified we took you through tax saving options for aggressive investors or risk takers. But if you are averse to taking risk for variety of reasons, this session is for you. Here we’ll focus on helping conservative or risk-averse individuals to plan their taxes wisely.



So, let’s begin with our session today and first let’s understand who can be classified as a conservative investor or one who’s averse to taking risk.

Typical Traits of a conservative investor

  • Typically he/she is in the conservation and protection phase of life – on the verge of retirement or already retired;

  • Very soon would be waving a goodbye to his regular source of income or already has;

  • May have created considerable assets, but now has a conservative approach;

  • Has a low risk appetite in the process of wealth creation;

  • Has liabilities to pay off;

  • Has dependent family members and therefore responsibilities to shoulder; and

  • Vital financial goals are to be met in the short term

Tax saving investment avenues for conservative investors


So, if you match traits of a conservative investor or one who is averse to taking risk, tax saving investment instruments offering assured returns would be a suitable choice for tax planning.

Let’s discuss the tax saving investment instruments you may consider in this category...

  • Non-Unit Linked Insurance Plans or Traditional Insurance Plans



  • Broadly they are of two types: “pure term life insurance plans” and “insurance-cum-investment plans”.

  • Pure term life insurance plans provide pure life protection and do not include any embedded investments. They offer a high insurance cover at relatively lower premiums vis-à-vis traditional insurance plans.

  • Insurance-cum- investment plans on the other hand, club insurance and investments. For the same premium, the insurance coverage is far lesser than pure term insurance plans. Such insurance plans include: endowment plans, money back plans, pension plans etc. Ideally, you should separate insurance and investment.


  • The insurance premium you pay – irrespective of the insurance plan – is eligible for a deduction u/s. 80C of the Income Tax Act, 1961 upto a limit of Rs 1.50 lakh. However, one must not buy insurance plans with the objective of tax saving, it should be purely to cover risk to life.

  • Public Provident Fund (PPF)

  • PPF scheme is a statutory scheme of the Central Government of India.

    • To participate in this scheme, open a PPF account at your nearest post office or public sector (nationalized) bank.

    • The PPF account has an expiry of 15 years from the end of the year in which the initial investment (subscription) to the account is made.

    • You can invest in the account ranging from a minimum of Rs 500 to a maximum of Rs 150,000 in a financial year. You have the convenience of investing either lump sum or in instalments not exceeding 12 in a financial year. However, it is not necessary to place a deposit every month and the amount can be in multiples of Rs 5, subject to the minimum (Rs 500) and maximum (Rs 1,50,000) investment limits.

    • Investing in PPF offers a tax-free interest @ 8.1% p.a.1 You can withdraw from the PPF account only on completion of 6 years from the end of the year in which initial investment (subscription) to the account is made. However, your withdrawal will be restricted to 50% of the amount that stood to the credit of your account at the end of the 4th year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower. When you complete the term of 15 years, the entire amount standing to the credit of the PPF account can be withdrawn together with the interest accrued till the last day of the month, preceding the month in which application for withdrawal is made.

    • After the term of 15 years is over, you may even renew your account within one year of maturity for another period of 5 years without having the compulsion of putting any further deposits in case of extension.



    • The withdrawal in case of extended accounts is permissible once in every financial year. But the total withdrawal should not exceed 60% of the balance accumulated to the account at the commencement of the extension period (of 5 years).

    • The contribution made to the PPF account qualifies for a deduction u/s. 80C (of Income Tax Act, 1961) subject to the maximum eligible limit of Rs 1.50 lakh p.a. Also, the maturity amount received (by you or your beneficiary) is currently exempt from tax.


    1 Applicable from April 01, 2016 to June 30, 2016

  • National Savings Certificate (NSC)


  • NSC is also a scheme floated by the Government of India.


    • You can invest in this scheme, through your nearest post office (as the scheme is available only with Indian Post).

    • The certificate has a tenure of 5 years and can be made in your own name either singly, or jointly (by two adults), or even for minor through a guardian.

    • A 5-year NSC carries a prefixed interest rate @ 8.1%p.a.2 compounded half-yearly, thus giving you an effective interest rate of 8.26% p.a. The interest income will accrue annually and will be reinvested further in the scheme till maturity or until the date of premature withdrawals.

    • However, interest income earned on NSC is taxable in the year in which it accrues.

    • The minimum amount which you can invest is Rs 100, with no maximum limit. However, Section 80C tax benefit can be claimed only for an investment upto Rs.1.5 lakh. Any investment exceeding this limit will not be eligible for the tax benefit.

    • Premature withdrawals are permitted only in specific circumstances such as death of the holder.


    The amount invested in NSC along with the accrued interest of the relevant financial year is eligible for tax deduction u/s. 80C of the Income Tax Act, 1961 upto a maximum limit of Rs 1.50 lakh p.a.

    In case if you have no other income apart from interest income, in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-G (if you are a general or non-senior citizen) or Form 15-H (if you are a senior citizen) to the post office.

    2 Applicable from April 01, 2016 to June 30, 2016


    • 5-Year Tax Saving Bank Deposits
    • Banks offer 5-Year Tax Saving Bank Deposits.


    • They come with a lock-in period of 5 years. So premature withdrawals are not allowed.


    • The prefixed rate of interest offered varies from bank to bank.


    • The interest earned is taxable.


    • Banks offer 5-Year Tax Saving Bank Deposits.


    • The minimum amount you can invest is Rs 100 but the maximum allowed is Rs 1.50 lakh in a year.


    The amount invested is eligible for a deduction u/s. 80C of the Income Tax Act, 1961 upto a maximum limit of Rs 1.50 lakh p.a. In case if you have no other income apart from interest income, in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-G (if you are a general or non-senior citizen) or Form 15-H (if you are a senior citizen) to the bank(s).


    5-Year Post Office Time Deposits (POTD)

    As the name goes, this time deposit is offered by India Post. So, if you are considering saving tax by investing in this scheme, approach your nearest post office.

    • 5-Year POTD can be opened either singly, or jointly (by two adults), or even in the name of a minor (through guardian).

    • The minimum investment can be as little as Rs 200, and there’s no upper limit…but the investment amount over Rs 1.50 lakh will not be eligible for any tax benefit.

    • 5-Year POTDs earn interest @ 7.9% p.a.3 (compounded quarterly) but paid annually, thereby giving you an effective interest rate of 8.14% p.a.

    • The interest earned on POTD is taxable.

    • You are permitted to withdraw prematurely, but only after 1 year from the date of deposit. However the interest earned in such case shall be 1% lower than the rate specified for a 5-Year period deposit.


    The amount invested in POTD is eligible for a deduction u/s. 80C of the Income Tax Act, 1961 upto a maximum limit of Rs 1.50 lakh p.a.

    3 Applicable from April 01, 2016 to June 30, 2016

    Senior Citizens Savings Scheme (SCSS)

    SCSS is an effort made by the Government of India for the empowerment and financial security of senior citizens.


    • So, if you are aged 60 years and above, you are eligible to invest.

    • Moreover, if you have attained 55 years of age and have retired under a voluntary retirement scheme; then too you are eligible to invest.

    • You are required to open a SCSS account (which can be opened singly or jointly with your spouse) to enjoy the benefits of the scheme. The account can be opened at your nearest post office or any nationalised bank.

    • You can start by investing as little as Rs 1,000, but the maximum allowed is Rs 15 lakh.

    • SCSS offers an interest rate @ 8.60% p.a.4 payable on a quarterly basis (i.e. on March 31, June 30, September 30 and December 31) every year from the date of deposit.

    • However, the interest earned by you is taxable.

    • SCSS has a maturity period of 5 years.

    • After maturity you can extend your SCSS account for a period of 3 years but within 1 year from the maturity by giving an application in the prescribed format.

    • Premature withdrawals too are permitted but only after 1 year from the date of opening the account. If you withdraw between 1 and 2 years, 1.5% of the deposit will be deducted. And in case if you withdraw after 2 years, 1% of the deposit is deducted. But in case of accounts which are extended after maturity, the accounts can be closed any time after expiry of one year of extension without any deduction.

    Investments upto Rs 1.50 lakh in SCSS are entitled for a deduction under Section 80C.

    If you have no other income apart from interest income, then in order to avoid Tax Deduction at Source (TDS), you can submit a declaration in Form 15-G (if you are general or non-senior citizens) or Form 15-H (if you are a senior citizen) to the post office or bank as the case may be.

    4 Applicable from April 01, 2016 to June 30, 2016

    Pension Funds

    Pension funds offered by mutual funds can not only be used for tax planning, but also as an effective instrument to plan for a peaceful retired life.


    • Most Pension funds typically allocate a predominant portion of their assets in debt and the rest in equity. Conservative investors may avoid any pension fund with a predominant equity component.

    • However, pension funds do carry some element of risk vis-à-vis assured returns products owing to their market linked nature.

    • They have a higher potential for wealth creation over the long run than assured returns products owing to the equity component.

    • At the vesting age, you may choose to withdraw fixed amounts at a regular frequency through Systematic Withdrawal Plans (SWPs) to meet your retirement cash flows.

    • Being a debt-oriented scheme, they are subject to long term capital gains tax (LTCG) post indexation benefits.



    The amount invested in pension funds qualifies for deduction under Section 80C of the Income-Tax Act, 1961 subject to a maximum limit of Rs 1.50 lakh p.a.

    Here’s a snapshot of the assured returns tax saving instruments, if you are averse to taking risk as an investor …

    Tax planning options for risk-averse investors: A snapshot
    Schemes Current
    Returns
    Tenure Min – Max Investment Premature Withdrawal Current Tax
    on returns
    Public Provident Fund 8.1% p.a. 15 years^ Rs 500 - Rs 1. 5 lakh Yes* Interest income is tax free
    National Savings Certificate 8.1% p.a. for 5 yr deposit ( compounded half-yearly) 5 years Rs 100 - No upper Limit No Interest accrued is taxed every year as per one’s income-tax slab
    Tax Saving Bank Deposits Varies from bank-to-bank For SBI: 7.00% p.a. 5 years Rs 100 - Rs 1.5 lakh No
    Post Office Time Deposit 5-Yr: 7.9% p.a.;(compounded quarterly & paid annually 5 years Rs 200 - No upper Limit Yes*
    Senior Citizens Savings Schemes 8.6% p.a. (payable quarterly) 5 years Rs 1,000 - Rs 15 lakh Yes*
    Non-ULIP Insurance Plans / Traditional insurance plans Sum Assured Only (i.e. Insurance Cover) 5-40 years Premium depends upon the insurance cover Varies from policy to policy Redemption amount is tax free
    Pension Funds Variable These funds have a 3-5 year lock-in period
    in some cases and an exit load till one
    attains 58-60 years of age. One can decide
    type of regular pay-outs post the exit load period
    Rs 500 – No upper limit Yes (subject to applicability of exit load, if any) Long Term Capital Gains
    All information is as of March 2016, Interest rates applicable
    from April 01, 2016 to June 30, 2016 (except for SBI Tax Saving Deposit)
    * Partial withdrawals allowed subject to conditions; ^can be extended in tranches of 5 years

    Here are the final...

    Points to remember...
    • Tax planning is a year-long exercise.

    • Complement tax planning and investment planning.

    • If you are conservative or risk-averse individual, consider investment avenues across market-linked and assured returns products.

    • Avoid buying insurance just to save tax. Ideally keep your investment and insurance needs separate.

    • Public Provident Fund (PPF) proceeds are tax free on maturity.

    • Interest earned on National Savings Certificate (NSC) is chargeable to tax in the year in which it accrues

    • If you are aged 60 years and above, you may consider investing in Senior Citizen Savings Scheme. Likewise, if you have attained 55 years of age and have retired under a voluntary retirement scheme.

    • If you looking at serving two objectives – planning for retirement and tax saving – you may consider debt oriented pension plans offered by mutual funds. They have a higher wealth creation potential owing to their equity component.

    [This video transcript is dated April 04, 2016.]

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