Equity Linked Savings Schemes (ELSS)
Equity Linked Savings Scheme or ELSS is a diversified equity mutual fund that provides you with a tax saving benefit. Hence, ELSS is also commonly known as a Tax Saving Fund.
A distinguishing feature about ELSS is that they are subject to a compulsory lock-in period of three years. The minimum application amount for most ELSS is as little as Rs 500, with no upper limit.
You can make either a lump sum investments or invest via Systematic Investment Plan (SIP) – a mode of investing in mutual funds. In the case of the latter, each instalment has a three-year lock-in period. But to buffer the shocks of volatility in the equity markets, SIPs are a worthy route that provides the benefit of rupee-cost averaging and compounding.
In the long-term, if you intend to create wealth, ELSSs have the potential to clock luring inflation-adjusted returns.
When you select ELSS, give importance to the ones that have a consistent performance track record and follow robust investment processes & systems at the fund house. Don’t get lured merely by the returns clocked, because there’s more to evaluating a mutual fund scheme than just returns. Remember, past performance does not guarantee that the fund will continue to fare in the same manner in the future. Hence, look for a fund with a consistent performance track record besides qualitative aspects like fund house pedigree, investment process, quality of the fund management team, among others.
Want to know the best ELSS for your portfolio? Click here.
Unit-linked Insurance Plans (ULIPs)
These are typically insurance-cum-investment plans that enable you to invest in equity and/or debt instruments. The premium you pay, after accounting for allocation and other charges, is invested in equity and debt securities.
All you simply need to do is, select the allocation option as provided by the Unit-linked Insurance Plan (ULIP). Generally, fund options are classified as “aggressive” (which invests in equity), “moderate or balanced” (which invests in debt as well as equity), and “conservative” (which invests purely in debt instruments).
Hence, apart from the insurance cover, which is usually 10 times your annual premium offered under these plans, ULIPs offer investment returns that are completely market-linked. To track the performance of such funds, the NAV is declared on a regular basis.
ULIPs have a minimum five-year lock-in period, and also have a minimum premium paying term.
The overall term of the policy would vary from product to product. But to claim a tax benefit, the policy has to be active for a minimum of five years.
In case of any eventuality, the beneficiaries would be paid the sum assured or fund value, whichever is higher.
But a noteworthy point is, while some well selected ULIPs may add value to your portfolio in the long-term; your insurance and investment needs should be handled separately. Thus this enables you to have optimum insurance coverage and the right investment instruments for long-term wealth creation.
When it comes to insurance, assess your Human Life Value (HLV) – a scientific approach to determine how much insurance cover you ideally need to protect your dependents from a financial loss in the case of an unfortunate event. PersonalFN's HLV calculator can help you know the optimal insurance cover you need. To invest and address long-term financial goals, start a SIP in worthy mutual funds by ensuring you are picking the right schemes as per your risk profile.
National Pension System
The National Pension System was earlier available only to Government employees. Later, on May 1, 2009, it was also introduced for people in the unorganised (private) sector because a need for deeper participation in the pension contribution was felt.
For NPS, if you (eligibility age: from 18 years to 60 years) belong to the unorganised sector (i.e. private sector); the contributions done by you towards the scheme would be voluntary, and you can invest in any of the two under-mentioned accounts:
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Tier-I Account – This account is a mandatory account and the minimum investment amount is Rs 500 per contribution and Rs 1,000 per year. If you do not contribute the minimum yearly contribution, the account will be frozen. And to unfreeze the account, you need to contribute the total sum of minimum contributions missed and a penalty of Rs 100 per year.
Under this account, premature withdrawals are actually not permitted before attainment of 60 years; but can be allowed only in the form of repayable advance and only if you’ve completed 15 years. Such withdrawals are permissible only in case of critical illness and emergency. The objective of this account is to build a retirement corpus and buy a life annuity. You can operate this account anywhere in the country, irrespective of your employer and job location.
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Tier-II Account – This account is a voluntary account. To have a Tier-II account, you first need to have a Tier-I account. The tier-II account can be opened with a minimum contribution of Rs 1,000.
Recently, the government took a decision to allow even the contribution to Tier-II account by government employees eligible for a tax deduction under Section 80C, provided they remain invested for 3 years. There is no tax benefit on investment towards Tier II NPS Account for non-government employees.
From the Tier-II account, you are permitted to withdraw as and when you wish to. There’s no penalty whatsoever. So, the Tier-II account serves just like your savings account.
While investing money in NPS, you have two investment choices, i.e. “Active” or “Auto” choice.
Under the “Active” choice asset class, your money will be invested in various asset classes termed as ECG, viz. E (Equity), C (Credit risk bearing fixed income instruments other than Government Securities), and G (Central Government and State Government bonds). This gives you the option to decide your asset allocation into these specific asset classes.
In the case of Auto Choice, which is the lifecycle fund, money will be automatically invested based on the age profile of the subscriber.
And if you don’t signify the choice while investing, the Auto Choice will be the default option.
In November last year, the PFRDA introduced two new investment options called: 'Aggressive Life Cycle Fund' and 'Conservative Life Cycle Fund'. In the former, you can invest up to 75% in equities, while in the latter, 25% will be parked in equities. The purpose of introducing these additional investment options was to attract young investors who can afford to take the risk and for the risk-averse investors.
Non-Resident Indians (NRIs) can now actively participate in NPS.
Exit option for NPS:
At the age of 60, you can exit NPS. However, you are required to invest a minimum 40% of the fund value to purchase a life annuity. But if the total accumulated pension corpus is less than or equal to Rs 2 lakh, as a subscriber you can opt for 100% lump sum withdrawal.
For exit from NPS before the age of 60, a compulsory annuity of minimum 80% of fund value needs to be purchased. The remaining 20% of the money can be withdrawn. But if the corpus is less than Rs 1 lakh, complete withdrawal is permitted.
At the time of death of the subscriber, the entire accumulated corpus (i.e. 100%) will be paid to the nominee or legal heir. There will not be any purchase of an annuity and the entire proceeds received will be tax-free in the hands of the nominee/legal heir.
Recently, the government took a decision to make NPS withdrawals tax-free. At the time of withdrawal, 60% of the amount won’t attract any tax. The remaining 40% amount, which has to be mandatorily utilised to buy an annuity, is exempt from tax even at present. So, in effect now entire withdrawals from NPS are now exempt from income tax. Therefore now NPS is at par with other retirement-oriented schemes such as Employees’ Provident (EPF) Fund and Public Provident Fund (PPF).
If you are a salaried individual you claim deduction under Section 80CCD(1) up to Rs 1.5 lakh for own contributions towards NPS account (As per Section 80CCE, the aggregate amount of deduction under Sections 80C, 80CCC and 80CCD(1) cannot exceed Rs 1.5 Lakh).
In addition to this, a deduction can be claimed under Section 80CCD(2) if there is any contribution made by the employer but only up to 10% of their salary (Basic Salary + Dearness Allowance). It is noteworthy that the deduction under Section 80CCD(2) can be claimed over and above the permissible deductions under Section 80C.
If an Individual contributes from his income alone towards NPS, it will be considered within the limits of Rs 1.5 lakh p.a. under Section 80CCE (As per Section 80CCE, the aggregate amount of deduction under Section 80C, 80CCC and 80CCD(1) cannot exceed Rs 1.5 Lakh).
If you are self-employed, you can avail a deduction under Section 80CCD(1) up to 10% of your gross total income (which is comprised of income computed under different heads before reducing it by all other deductions available under Section 80). In addition to deductions under Section 80CCD(1), self-employed people are also entitled to deductions under Section 80C for other instruments eligible therein.
In the Union Budget 2015-16, the government inserted a new sub-section 80CCD(1B) in section 80CCD which provides an additional deduction of Rs 50,000 for the contribution made by an individual assessee under the NPS (On this additional contribution, the ceiling of Rs 1.5 lakh under section 80CCE is not applicable).