Seven tax-saving investments for the risk averse

Selecting the right tax-saving investments may not come easy for all. While some tax-savers are market-linked, i.e., the return generated is not fixed (rather it depends on the performance of the underlying securities such as equity or debt), there are those that come with assured returns. 

Choosing between the two will largely be a function of one's appetite for risk and other factors such as liquidity. While those with a higher risk appetite will have more 'unpredictable' products like equity in their portfolios, the risk averse will look for more stable investments. Risk averse investors would not want to expose their savings to volatile investments where returns are not fixed. 

So, if you are someone who does not want to take much risk with their investment and want assured returns, here are seven fixed-income, tax-saving avenues to choose from. 

1. Public Provident Fund
The Public Provident Fund (PPF) currently (subject to change every three months) offers 7.6 percent per annum compounded annually. It is a 15-year scheme, which can be extended indefinitely in a block of 5 years. It can be opened at a designated post office or bank branch. Certain banks now allow you to open one online. 

Points to remember: PPF suits those investors who do not want volatility in returns akin to equity. However, for long-term goals and especially when the inflation-adjusted target amount is high, it is better to take equity exposure, preferably through equity mutual funds, including tax-saving equity-linked savings schemes (ELSS) and not solely depend on PPF. 

2. Voluntary Provident Fund

Foe employee it is mandatory to contribute 12 percent of one’s basic pay (employer contributes equal amount) into one's Employee's Provident Fund (EPF). However, one may voluntarily increase one's own contribution up to 100 percent of basic and dearness allowance into Voluntary Provident Fund (VPF). The provident fund statement will show the breakup of contribution towards EPF as well as VPF. 

VPF is a part of EPF and all the rules remain the same. The interest rate is declared by the government each year and the interest earned on the EPF/VPF account is tax-exempt long as the employee continues in his service for five continuous years or more. 

Interest rate for 2017-18: 8.55 percent 
Interest rate for 2016-17: 8.65 percent 
Interest rate for 2015-16: 8.8 percent 

Points to remember: Although one may opt-out from VPF by intimating one's employer, the money contributed towards VPF, which represents additional savings towards retirement, gets locked-in for a longer tenure, therefore, use the VPF route judiciously. 

3. Senior Citizens' Savings Scheme 
Probably the first choice of most retirees, the Senior Citizens' Saving Scheme (SCSS) is a must-have in their investment portfolios. As the name suggests, the scheme is available only to senior citizens and early retirees. SCSS can be availed from a post office or a bank by anyone above the age of 60. Early retirees can invest in SCSS, provided they do so within one month of receiving their retirement funds. SCSS comes with a five-year tenure, which can be further extended by three years once the scheme matures.. 

According to a notification from the Ministry of Finance dated October 3, 2017, the minimum age limit for investing in SCSS for retired defence personnel (excluding civilian defence employees) has now been fixed at 50 years. Earlier, they were allowed to invest in SCSS irrespective of when they retired. 

Points to remember: Currently, the interest rate on SCSS is 8.3 per cent per annum, payable quarterly and is fully taxable. The rates are set each quarter and linked to the government securities rates but once invested, the rates remain fixed for the entire tenure. The upper investment limit is Rs 15 lakh, and one can open more than one account. 

4. Post Office Time Deposit Account (POTD) 
Available for tenures of 1, 2, 3 and 5 years, it's only the 5-year deposit that enjoys Section 80C tax benefit. Currently, it offers an interest rate of 7.4 per cent per annum. It is payable annually, but compounded quarterly. 

Points to remember: As the interest gets paid annually, the yearly visit to the post office may not be always possible. Therefore, you could give a standing instruction to the post office to transfer the interest amount to your post office savings account. You can now invest via a bank as well. 

5. National Savings Certificates 
Currently, the 5-year National Savings Certificates (NSC) offers an interest rate of 7.6 per cent per annum and is fully taxable. NSC does not offer monthly or yearly interest payout and only has the cumulative option. 

Points to remember: The interest accrues annually, but is deemed to be reinvested. The interest of each year qualifies for benefit under Section 80C, except in the last year. 

6. Sukanya Samriddhi Yojana 
Sukanya Samriddhi Yojana (SSY) currently fetches an interest rate of 8.1 percent compounded annually. Currently, SSY offers the highest tax-free return with a sovereign guarantee and comes with the exempt-exempt-exempt (EEE) status. SSY can be opened any time after the birth of a girl till she turns 10, and you have to invest a minimum of Rs 1,000 annually. A maximum of Rs 1.5 lakh can be deposited during each financial year. 

Points to remember: The account will remain operative for 21 years (contribution to be paid for 15 years) from the date of its opening or until the marriage of the girl after she turns 18. 

7. 5-year notified tax saving fixed deposits
For someone who has not exhausted the yearly Section 80C limit of Rs 1.5 lakh and is looking for a debt tax saver, can consider the 5-year notified tax-saving bank fixed deposits. It comes with monthly, quarterly or cumulative interest payout options on the investment. 

Points to remembe r: Currently, the interest rate on 5-year bank fixed deposit is 6 to 6.5 per cent (additional 0.5 percent for seniors) and is fully taxable. 

Don't just blindly invest…
Although these financial products come with fixed returns, you should also consider the post-tax return. If the interest earned is taxable then one will have to pay the tax according to one's income slab rate at 5.15 percent, 20.6 percent or 30.9 percent. For someone who pays 30.9 percent tax, the post-tax return on a 5-year bank fixed deposit of 7 per cent is 4.8 per cent per annum. So, even though they help you save tax for the current year, the interest income becomes a tax liability each year till the end of the tenure. 

On the flip side, one may not necessarily end up paying income tax on the interest income earned from fixed-income taxable investments. This will be possible if the total interest income falls short of the basic exemption limit for paying income tax as per the Income Tax Act. 

Illustratively, a taxpayer between the ages 60 year and 80 years earns only interest income from such taxable investments of about Rs 3 lakh a year. Since the income for such individuals is exempted till Rs 3 lakh, even the interest earned from investment in taxable products does not translate into tax liability for them. 

Here is what you should do: A low post-tax return after adjusting for inflation will not help you in achieving your goals in the long run. Inflation erodes the purchasing power of money, especially over the long term. Although these investments will help you reduce your tax outgo and preserve your capital, it will not lead to wealth creation over the long term. For wealth creation over the long term, you have to expose a part of your savings to equities as well to take care of inflation. The actual allocation will depend on one's age, risk profile, investible surplus etc. An aggressive investor may look at anywhere between 65-75 percent of their savings in equity-oriented investments.