Investments for saving tax in India

Am writing this, while being bombarded by a few people about many queries related to the income tax, savings instruments etc.

We will discuss these following things in general:

1) Tax slabs for different types of individuals
2) Examples for people with different income levels - with or without savings.
3) Different investment avenues
4) My advise for different people to approach the tax savings


Tax slabs for different types of individuals -

Individuals (Actually Men & HUFs) -
First Rs 1,10,000/- is exempted
Next 1.10 L - 1.60L @ 10%
Next 1.60 L - 2.60L @ 20%
Next 2.60 L - 10.0L @ 30%
10.0 L onwards - @ 30% + surcharge @ 10% of total tax payable/paid.

Women -
First Rs 1,45,000/- is exempted
Next 1.45 L - 1.95L @ 10%
Next 1.95 L - 2.95L @ 20%
Next 2.95 L - 10.0L @ 30%
10.0 L onwards - @ 30% + surcharge @ 10% of total tax payable/paid.

Sr. Citizens -
First Rs 1,95,000/- is exempted
Next 1.95 L - 2.45L @ 10%
Next 2.45 L - 3.45L @ 20%
Next 3.45 L - 10.0L @ 30%
10.0 L onwards - @ 30% + surcharge @ 10% of total tax payable/paid.


Examples for people with different income levels - with or without savings :

Don't have energy left to write about these, so am pointing you to some old examples.
These examples are for last years tax slabs, but I think you would generally get an idea.


Different investment avenues for saving tax:

There are many different avenues which an individual can access for tax savings.
Here am primarily talking about tax saving instruments only,' ocs in my view,
somebody who does the tax saving part of the salary/income diligently, would certainly
become a prudent investor pretty soon.

PPF - Public provident Fund. Minimum lock in period is 3 years and total tenure for a PPF account is 15 yrs. Can be opened in SBI or I think some other nationalized banks and also Post Offices. I have mine in Post Office. but do remember, if you don't deposit anything for a whole year, they deduct Rs 100/- from the account. I did pay the penalty a couple of times in last few years.

NSC - National Savings Certificate. It is a fixed 6 yr savings certificate (i.e., lock in period here is 6 yrs ) and it generates an interest income of 8% compounded half yearly. e.g., a sum of Rs 10,000/- invested today would become Rs 16,010/- after 6 years.

LIC - Am not saying insurance as such, 'cos LIC in general is an investment avenue in itself, and there are many plans which nobody else offers. Well, LIC has a plethora of insurance cum investment plans for individuals, couples ,kids for all different ages. Generally, almost all of these insurance plans ar for 15-20-25 years, so these are like real long term investments. The plan should be well chosen as per the age, life stage of an individual, and not because an agent is pushing you.
And I must say, LIC has some very good plans for Indian customers. And the huge advantage when somebody purchases an LIC plan is of credibility that LIC has been in India since ages and that it has been giving money to people for years.

ULIPs ( Unit Linked Insurance Plans) - These are pseudo insurance plans floated by all the insurance companies including LIC these days and the insurance companies are in the market with big gums promoting all the different ULIP plans with huge sales and marketing schemes, advertisement propaganda. These insurance plans invest part of your premium in the stock market either under some existing plans or with new schemes in the stock market/debt market. Don't ask me about debt market right now, I ll explain another day may be. but primarily, ULIP plans cut the mortality charges ( money required for the insurance company to insure an individual for the specified sum assured) and also deduct admin charges, initial charges, yearly charges, stationary charges, abc charges, def charges, ..., xyz charges, list goes on, and I think they still don't disclose all of them.

ELSS( Equity Linked Saving Schemes) - These are purely investment instrument, whereby all your money is invested in the tax saving mutual funds.I hope nobody is asking, what is a mutual fund. So, different Fund houses, like SBI, HDFC, Reliance, Fidelity, Sundaram, etc have their own tax saving plans. Each plan has a different motive. Invest in whichever suits you, and yes, if you were thinking about it, the lock in here is 3 yrs. I guess, its the minimum in almost all of the tax saving instruments I have discussed above.

For layman, a mutual fund is a group of people, pooling in money to invest in the stock market to generate better returns, where in that pooled money is managed by professionals.
In mutual funds, there are a few options, which are initially confusing for people. The investment options are
1) GROWTH - the money grows with time and investor can redeem whenever they want.
2) DIVIDEND - the money grows and the fund house declares dividend ( you can say the profit of the money invested) and pays it
to the investors. The declaration is on the fund house discretion.
3) DIVIDEND RE-INVESTMENT - the money grows and the fund house declares dividend ( you can say the profit of the money invested) and
invests the money back into the mutual fund on behalf of investor.

My 2 annas, never choose the 3rd option(Dividend Re-investment).
If you want the profit to be returned to you periodically, choose 2nd(Dividend) option, that is fund house discretion, when they declare the dividend.
Else if you want to keep the option with yourself, choose the 1st (Growth) option. My recommendation would be to go for GROWTH option generally.


My advise :

People who have just started their carrier, i.e., in 20+ age before 30 yrs of age - should primarily invest all their investible surplus in the Mutual Funds. So for tax saving, they should invest all of the amount left after EPF (Employee Provident Fund) in these ELSS funds.

My suggestion is to choose between the following schemes to start with :
1) SBI Magnum Tax Gain Scheme 93 - Growth
Fund start date : Mar 1993
Return since start date - 18 % p.a. [Compounded annual growth rate, CAGR, you would read many times in many articles]
Return for last 3 years - 65 % p.a.

2) HDFC TaxSaver Growth - Growth
Fund start date : 1996
Return since start date - 31 % p.a.
Return for last 3 years - 49 % p.a.

3) Birla SunLife Tax Relief 96 - Growth
Fund start date : 1996
Return since start date - 35 % p.a.
Return for last 3 years - 48 % p.a.

4) HDFC Long Term Advantage - Growth
Fund start date : 2000
Return since start date - 38 % p.a.
Return for last 3 years - 43 % p.a.

All the above mentioned schemes are open ended tax saving schemes, and so you can invest in any of these any day of the year.

With, time and different life stages, people should start purchasing the term insurance policies, start investing in money back and with profit plans from LIC. I guess, I ll talk about them some other day, and this much is enough for today.

Please feel free to provide any feedback, and I shall update it with your suggestions. Or may be to know more about anything I have mentioned as a passing reference, drop in a note.


Glossary of terms :

Previous Year - Is the year in which we earned the money
Assessment Year - Is the year in which we are filing the tax return for the money earned
in the previous year.
Financial Year - Is the same as the previous year.

{ e.g., when we file return in May-June 2008, the A.Y is 2008-09 and the P.Y or F.Y is 2007-08 }

HUF - Hindu undivided Family
CAGR - Compounded annual growth rate