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Here's a quick comparison of interest rates on tax-saving debt investments

But before you get down to choosing a tax saving investment you should probably first calculate how much you need to invest to save tax.

, ET Online|
Last Updated: Jan 07, 2020, 12.39 PM IST
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As the New Year starts, the countdown for finishing the task of tax-savings also starts. In case you are struggling to choose a tax saving investment, here's a quick primer on the current interest rates and how to invest in the available debt tax saving investments.

But before you get down to choosing a tax saving investment you should first calculate how much you need to invest to save tax. There are certain expenditures and mandatory investments that are allowed under section 80C of the Income-tax Act, 1961 to save tax up to Rs 1.5 lakh. You may have already incurred these expenditures or made some of these investments. Therefore, before making tax-saving investments, one must check whether one is required to make additional investment to save tax.

Also Read: 5 things to consider before making any fresh investment in 80C

1. EPF and VPF
Employees' Provident Fund (EPF): If you are a salaried employee, covered under the Employees' Provident Fund (EPF) Act, then your contributions to EPF would also qualify for section 80C tax rebate. This is a mandatory investment that automatically happens if you work in a company covered under the EPF Act. The interest you earn on your EPF contributions is exempt from tax and fixed annually by the Employees' Provident Fund Organisation (EPFO) in consultation with the government. The government is yet to announce the interest rate for the financial year 2019-20.

However, the contributions made by you to EPF is deducted as a fixed percentage from your basic salary plus dearness allowance (DA) which might not be sufficient to use up the entire tax saving limit under section 80C.

According to the EPF rules, an employee makes contribution of 12 percent of his basic salary plus DA on a monthly basis. Therefore, someone having Rs 20,000 as his monthly basic will be contributing Rs 2,400 on monthly basis or Rs 28,800 annually. This is far less than the permissible limit of Rs 1.5 lakh under section 80C of the income tax Act. If you are a woman employee who has joined the workforce for the first time, then your contribution will be capped at 8 per cent as per the Budget 2018 announcement.

Voluntary Provident Fund (VPF): If the amount deducted from your salary is insufficient to avail the full benefit under section 80C, then you can make additional contribution to provident funds via VPF or Public Provident Fund (PPF). The benefit of VPF is available only to salaried person covered under EPF. The rules for EPF and VPF are same. This will be deducted from your salary and thereby decreasing your take-home salary. Both EPF and VPF are EEE (exempt-exempt-exempt) investments. The EEE status means that the amount invested, interest earned, and maturity proceeds are exempt from tax.

Interest rate offered: Yet to be announced by the government for FY 2019-20
Maximum investment amount: Up to 100% of basic salary and DA
How to invest: Employee needs to inform his employer by submitting the same in a prescribed format and employer then has to start deduction of the same.
Tenure: Same as EPF

2. Public Provident Fund (PPF)
PPF is one of the most popular tax-saving investment avenues because it enjoys EEE tax status. Any Indian resident, salaried, self-employed or even a housewife can invest in PPF. An individual also has the option to open a PPF account on behalf of his minor child. One is required to make minimum single contribution of Rs 500 every year to keep the account active. The interest under this scheme is calculated on a monthly basis but is credited annually.

Interest rate offered: 7.9% (for January-March 2020 quarter)
Maximum investment amount: Rs 1.5 lakh in a financial year
How to invest: You can invest via banks, post office, and even using your Internet banking.
Tenure: 15 years

Also Read: Know all the rules and benefits of PPF account

3. 5-year National Savings Certificate VIII Issue
Investments under 5-year NSC VIII issue are eligible for deduction from gross total income under section 80C. The interest is compounded annually, reinvested but paid at the time of maturity. The interest earned is taxable in your hands since it is reinvested therefore, making it eligible for section 80C deduction (except in the year of maturity). No tax deduction at source (TDS) at the time of maturity. You have the option to take loan against the certificates.

Interest rate offered: 7.9% (for January-March 2020 quarter)
Maximum investment amount: No limit but tax benefit is available only up to Rs 1.5 lakh under Section 80C.
How to invest: One can buy NSC certificates from any post office
Tenure: 5 years

4. 5-year tax-saving fixed deposits
Tax-saving fixed deposits (FDs) of five years held either with bank or post office is another specified investment avenue under section 80C. The interest earned on these FDs is taxable in the hands of the investors. However, senior citizens can claim deduction for up to Rs 50,000 under section 80TTB.

As announced in February Budget 2019, TDS for individuals will be deducted only if interest paid during the year exceeds Rs 40,000. One must remember that, there is no change in the way interest is taxed. Interest from FDs are fully taxable in the hands of individuals.

Also, senior citizens are offered slightly higher interest rate on the bank FD. But this differential is not available on a 5-year post office time deposit (POTD). Do keep in mind that you cannot take loans against these fixed deposits or prematurely encash them before the completion of five years.

Interest rate offered: POTD: 7.7% (for January-March 2020 quarter).
Banks: Varies from bank to bank

Also Read: Top 5 tax-saving bank FDs

Maximum investment amount: Up to Rs 1.5 lakh
How to invest: One can visit either a bank branch or post office. You can also do the same via internet banking.
Tenure: 5 years

Also Read: NSC vs 5-year bank FD: Which is better tax-saving investment?

Schemes Interest rate (In %) Maximum investment amount Tenure
VPF Yet to be announced Up to 100% of basic + DA Same as EPF
PPF 7.9 Rs 1.5 lakh in FY 15 years
NSC 7.9 No limit, tax benefit up to Rs 1.5 lakh 5 years
5 year Post Office time deposit 7.7 No limit, tax benefit up to Rs 1.5 lakh 5 years
Bank tax-saving FD Varies from bank to bank Rs 1.5 lakh in FY 5 years
Sukanya Samriddhi Yojana 8.4 Rs 1.5 lakh in FY 21 years
Senior Citizens Savings Scheme 8.6 Rs 15 lakh, tax benefit up to Rs 1.5 lakh 5 years

5. Sukanya Samriddhi Account
You can invest in this scheme only if you have a girl child. The account can be opened any time after her birth till the time she turns 10. The account can be opened for a maximum of two girl children and you cannot open two accounts for one girl. While opening the account, you will be required to submit the birth certificate of the girl child along with other documents such as proof of identity, proof of address etc.

Interest rate offered: 8.4% (For January-March, 2020 quarter)
Maximum investment amount: Rs 1. 5 lakh in a financial year
How to invest: Account can be opened with at post office or authorised bank branches
Tenure: The account matures on the completion of 21 years from the date of opening or whenever the girl child gets married, whichever is earlier, subject to certain conditions.

Also Read: What is Sukanya Samriddhi Account? All you need to know

6. Senior Citizens Savings Scheme
Only senior citizens can invest in this scheme. Apart from its tax benefit, the scheme also offers quarterly interest payments which can be a source of income for them. Post maturity, account can be extended for three years. However, tax benefit will not be available on the extension.

One can invest in the scheme either individually or jointly with the spouse. There is no limit on the number of accounts that can be opened, but it should not exceed the maximum investment limit. Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not allowed to invest in this scheme.

Interest rate offered: 8.6% paid quarterly (For January-March, 2020 quarter)
Maximum investment amount: Rs 15 lakh. Tax benefit under section 80C is available up to Rs 1.5 lakh.
How to invest: Investment can be made at authorised post office or bank branches.
Tenure: 5 years. Post maturity, account can be extended by 3 years.

Also Read: All you need to know about Senior Citizens Savings Scheme

Watch outs
The interest rate offered on small savings schemes are reviewed by the government every quarter. The interest rates mentioned above are those as announced for January-March 2019. Banks decide the interest on the tax-saving FDs offered by them.
Click here for all the information and analysis you need for tax-saving this financial year
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