Paying taxes on gains made on your investments can get pretty annoying because its such a tease. You’d expect some huge return when your investment finally matures, only to realize that you’re not getting all of it. That’s why knowing about the taxability of your investments or knowing about tax free investments is very important.
Here are 4 investment options that are tax free:
#1. PPF: Public Provident Fund
If you invest in a PPF account there are 3 major tax benefits: 1.The returns on maturity are tax free 2. You can claim a tax deduction on part of your income equal to the amount invested in PPF. Example: Your income is Rs. 4,00,000 and you invest Rs. 50,000 in PPF then only Rs. 3, 50, 000 will be taxed. 3. The interest earned on PPF is tax free.
A ppf account is pretty safe because its backed by the Government Of India (and they are highly unlikely to default on payments). Its interest rate might not be the most attractive: around 8% per annum (subject to changes by the government) but its benefits are worth it if you are looking for a safe and steady investment option.
What’s the catch?
#1. Minimum investment amount required to keep your account active is Rs. 500 and maximum that you can deposit is only Rs.1, 50, 000.
#2. PPF has a lock-in period of 15 years, which can be extended in a block of 5 years.
#3. Your money is locked in a PPF account and you only withdraw it from the 6th financial year in case of emergencies. If you plan on withdrawing it any time before that it has many restrictions and I would only recommend that option if you’re in like a serious financial crisis and NEED your money desperately.
#2. Equity Shares:
If you invest in the stock markets, the dividends received on shares of some companies and the returns made on selling the shares are tax free. And stock markets can give an average of anything between 12%-15% annual returns.
What’s the catch?
#1. Stock market returns are pretty unstable. To make profits from equity shares you need to buy them at a low price and sell it at a higher price. This sounds easy but share prices are sensitive, one second they are up and the other down. That’s why though the profits from stock markets are amazing they are slightly risky.
#2. The profit you make by selling shares are called as capital gains in tax terms. Now if you hold the shares for more than a year and then sell them, they are called as long term capital gains. Only long term capital gains are tax free. The gains you make by selling your shares within a year (called as short term capital gains) are taxed at 15%.
After realizing that the Indian government was losing out on tax money because of these tax free gains on shares, from 2018 they decided to tax any long term capital gain above Rs. 1,00,000 at 10%.
#3. Tax-Free Government Bonds:
Tax free bonds are safe investment options issued by the government of India from time to time to fund their big infrastructure projects. They pay a fixed interest rate (a.k.a coupon rate) depending on the prevailing rates of other government securities in the market. The interest earned on these are completely tax free and on maturity the face value is returned.
What’s the catch?
#1. Since the proceeds from these bonds are invested in infrastructure projects like roads, highways etc. they have a long-term maturity period of 10, 15 or 20 years and you cannot withdraw the amount before the expiry of the applicable lock-in period.
#2. However investors have another option to exit the investment: They can sell their bonds on the secondary market. But any capital gains received from this will be taxable.
Rumor has it that most celebrities pick this investment option to avoid paying huge taxes on their income earned.
#4. ULIP: Unit Linked Insurance Plan:
These are a mixed product serving the dual purpose of protection and investing. It provides life insurance and helps invest your savings into different funds so that it can grow.
Most Ulips have 5 to 9 fund options investing in a mix of equity and debt. And you can switch between funds if you want to. The duration of these schemes is 15 or 20 years but the lock-in period is 5 years. The value received after exiting the policy (which is after the 5 years lock-in period) or on maturity is tax-free. Even switching between the fund’s options regardless of the holding period is tax free. The premiums paid too can be deducted up to the limit of 1.5 lakh from your total taxable income.
What’s the catch?
#1. It’s better to invest separately in a good insurance plan and mutual fund to enjoy higher returns because Ulips only make sense for investors who find it difficult to strike the balance between the two.
#2. Withdrawing before the maturity period doesn’t entirely make sense and can be financially damaging even if its done after 5-7 year.
So those were few ways you could ditch paying taxes legally. Obviously each one has its own hang ups but if you’re looking for a safe and steady option I’d say go for PPF or else if you’re the confident type plunge into equity investing and stay in it for the long run. And before you get impulsive with these options consult your CA to assist you.