Investing and tax planning go hand in hand. The amount of money you save in taxes can be re-invested to create more wealth in your compounding journey. Remember creating wealth is all about compounding.
In this article, we talk about some of the more conventional products such as Fixed Deposit (FD), Public Provident Fund(PF) and Employee Provident Fund (EPF) along with their impact on your taxes.
Long-Term Fixed Deposits (FD)
Long-term FDs are similar to the usual FDs except that their lock-in period is much longer (5 years) and the amount invested in the FD is not taxable. This comes under the 80C section of the income tax act and hence there is a limit of 1.5 lakh for the financial year. Bear in mind this 1.5 lakh includes other saving products that come under 80C. The current typical FD interest rate for 5 years and above is 6.5%.
An important point to note is that the interest from the long term FD is still taxable. Therefore, you will bear the taxes on the gains of your investment after 5 years. As the current interest rates are lower than before and are forecasted to go lower, a long term FD seems to be one of the less favorable options considering the returns will be quite low after the tax on gains.
Public Provident Fund
One of the oldest (introduced in the 60s) tax saving products, the Public Provident Fund (PPF) is often not given its due attention and is probably in the last of our investment preference list. PPF also falls under 80C section of the income tax act, which has an exemption limit of 1.5 lakh per year.
Employee Provident Fund
Whether we like it or not, almost all of us are part of the Employee Provident Fund (EPF) scheme. The great thing about the EPF is this forceful nature which protects the salaried class from bankruptcy.
Conclusion
Of the three products, long-term FD looks the weakest considering rate of return and the tax on the interest in FDs. The EPF is a product which you have little control over unless you can negotiate your pay structure. Therefore, PPF is probably the product one needs to consider for saving tax under 80C and plan for their retirement.
INDIA
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