RajkotUpdates.News is an online news portal that covers various topics related to Rajkot, Gujarat, India, and the world. The portal recently published an article on how to save tax with provident fund (PF), fixed deposit (FD), and insurance. The article explained the features, benefits, and limitations of these tax-saving instruments, and how to choose the best option for your financial goals and needs. In this blog post, we will summarize the main points of the article and provide some additional tips and insights.
What is PF?
PF is a retirement savings scheme that is mandatory for salaried employees in India. The scheme is managed by the Employees’ Provident Fund Organisation (EPFO), a statutory body under the Ministry of Labour and Employment. Under the scheme, both the employer and the employee contribute 12% of the employee’s basic salary and dearness allowance to the PF account every month. The PF account earns interest at a rate declared by the EPFO every year, which is currently 8.5% for FY 2022-23. The PF account also offers tax benefits under Section 80C of the Income Tax Act, 1961.
What is FD?
FD is a type of bank deposit that offers a fixed rate of interest for a fixed period of time. The depositor can choose the tenure of the FD, ranging from 7 days to 10 years, depending on their liquidity and maturity preferences. The FD account earns interest at a rate decided by the bank, which varies depending on the amount, tenure, and type of the FD. The FD account also offers tax benefits under Section 80C of the Income Tax Act, 1961, if the FD has a tenure of at least 5 years.
What is Insurance?
Insurance is a contract between an insurer and an insured, where the insurer agrees to pay a certain amount of money to the insured or their nominee in case of a specified event, such as death, illness, accident, or loss of property. The insured pays a premium to the insurer, either as a lump sum or in instalments, to avail the insurance coverage. The insurance policy also offers tax benefits under various sections of the Income Tax Act, 1961, such as Section 80C, Section 80D, Section 10(10D), and Section 10(10A).
What are the Benefits of PF, FD, and Insurance?
PF, FD, and insurance offer various benefits to the investors, such as:
- PF offers a high and guaranteed rate of return, which is usually higher than the inflation rate. PF also offers a long-term and compounding benefit, as the interest earned is reinvested in the PF account. PF also offers a tax-free withdrawal after 5 years of continuous service, or at the time of retirement, resignation, or death.
- FD offers a fixed and assured rate of return, which is usually higher than the savings account rate. FD also offers a short-term and flexible benefit, as the depositor can choose the tenure and frequency of the FD. FD also offers a tax deduction of up to Rs. 1.5 lakh under Section 80C, if the FD has a tenure of at least 5 years.
- Insurance offers a risk cover and a financial security, in case of an unforeseen event, such as death, illness, accident, or loss of property. Insurance also offers a long-term and growth benefit, as the insurer may invest the premium in various instruments, such as equity, debt, or hybrid funds, and offer a bonus or a dividend to the insured. Insurance also offers various tax benefits, such as deduction of premium under Section 80C or Section 80D, exemption of maturity or death benefit under Section 10(10D) or Section 10(10A), and rebate of tax under Section 88.
What are the Limitations of PF, FD, and Insurance?
PF, FD, and insurance also have some limitations and drawbacks, such as:
- PF has a low liquidity and a high lock-in period, as the withdrawal is restricted before 5 years of continuous service, or before the age of 58, except in certain cases, such as medical emergency, education, marriage, or house purchase. PF also has a tax implication, as the withdrawal before 5 years of continuous service is taxable, and the interest earned after the cessation of employment is taxable.
- FD has a low return and a high tax liability, as the interest rate is lower than the inflation rate, and the interest income is taxable as per the slab rate of the depositor. FD also has a penalty and a loss of interest, in case of premature withdrawal or closure of the FD account.
- Insurance has a high cost and a low transparency, as the premium is higher than the risk cover, and the charges and fees are not clearly disclosed by the insurer. Insurance also has a low return and a high risk, as the investment performance is dependent on the market conditions, and the insurer may not honour the claim in case of fraud, misrepresentation, or non-disclosure by the insured.
How to Choose the Best Option for Tax Saving?
PF, FD, and insurance are all eligible for tax saving under Section 80C of the Income Tax Act, 1961, which allows a deduction of up to Rs. 1.5 lakh from the gross total income of the taxpayer. However, the choice of the best option depends on various factors, such as:
- The risk appetite and the return expectation of the investor, as PF offers a low risk and a moderate return, FD offers a low risk and a low return, and insurance offers a high risk and a high return.
- The liquidity and the maturity requirement of the investor, as PF offers a low liquidity and a long maturity, FD offers a high liquidity and a short maturity, and insurance offers a low liquidity and a long maturity.
- The tax status and the tax bracket of the investor, as PF offers a tax-free withdrawal after 5 years of continuous service, or at the time of retirement, resignation, or death, FD offers a tax deduction of up to Rs. 1.5 lakh under Section 80C, if the FD has a tenure of at least 5 years, and insurance offers various tax benefits, such as deduction of premium under Section 80C or Section 80D, exemption of maturity or death benefit under Section 10(10D) or Section 10(10A), and rebate of tax under Section 88.
What are the Tips and Insights for Tax Saving?
PF, FD, and insurance are not the only options for tax saving, as there are many other instruments and avenues that offer tax benefits under various sections of the Income Tax Act, 1961, such as:
- Equity-linked savings scheme (ELSS), which is a type of mutual fund that invests in equity and equity-related securities, and offers a tax deduction of up to Rs. 1.5 lakh under Section 80C, and a tax-free capital gain of up to Rs. 1 lakh under Section 112A.
- Public provident fund (PPF), which is a government-backed savings scheme that offers a tax deduction of up to Rs. 1.5 lakh under Section 80C, and a tax-free interest and withdrawal under Section 10(11).
- National pension system (NPS), which is a voluntary retirement savings scheme that offers a tax deduction of up to Rs. 1.5 lakh under Section 80C, and an additional tax deduction of up to Rs. 50,000 under Section 80CCD(1B).
- Health insurance, which is a type of insurance that covers the medical expenses of the insured or their family members, and offers a tax deduction of up to Rs. 25,000 for self, spouse, and dependent children, and an additional tax deduction of up to Rs. 25,000 for parents, under Section 80D.
- Home loan, which is a type of loan that is taken to purchase or construct a residential property, and offers a tax deduction of up to Rs. 1.5 lakh for principal repayment under Section 80C, and up to Rs. 2 lakh for interest payment under Section 24(b).
Conclusion
RajkotUpdates.News is an online news portal that published an article on how to save tax with PF, FD, and insurance. The article explained the features, benefits, and limitations of these tax-saving instruments, and how to choose the best option for your financial goals and needs. In this blog post, we summarized the main points of the article and provided some additional tips and insights. RajkotUpdates.News is an online news portal that provides insights and analysis on various topics related to Rajkot, Gujarat, India, and the world.