Important keyword: Income Tax, NSC, optimized, Tax Savings & Deductions.
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National Savings Certificate (NSC)
The National Savings Certificate (NSC) is a trusted investment option offered by the Government of India through post offices, aimed at encouraging savings among individuals. It provides a secure and stable way to invest for the long term, guaranteeing a fixed return rate over a specified period. This makes it particularly appealing for cautious investors seeking steady growth and tax benefits. National Savings Certificate stands out as a reliable choice, ensuring both financial security and opportunities for tax savings, thus serving as an excellent option for risk-averse individuals looking to build their savings.
What is a National Saving Certificate?
The National Savings Certificate (NSC) is a savings scheme designed to attract small and mid-income investors by offering tax benefits under Section 80C of the Income Tax Act. Investors commit their funds for a fixed period of 5 years, during which they benefit from a risk-free return on their investment. The current NSC interest rate stands at 7.7% per annum, subject to periodic revisions by the government. This makes NSC a reliable option for investors looking to grow their savings steadily while also enjoying tax advantages.
Let’s Summarize the NSC scheme in the below table:
Minimum Investment
INR 1000
Lock-in Period
5 years
NSC Interest Rate
7.7% p.a.
Risk Profile
Low Risk
Tax Benefits
Deduction up to INR 1.5 lakhs u/s 80C
What are the Features of National Savings Certificate?
The National Savings Certificate (NSC) offers a flexible investment opportunity with several key features:
Minimum and Maximum Investment: There is no upper limit for investment in NSC. The minimum investment amount starts at INR 1,000, or multiples of INR 100 thereafter. Investors have the flexibility to increase their investment as per their convenience.
Access to the Certificate: National Savings Certificate can be purchased from any Post Office after completing the KYC verification process. The certificate is transferable between Post Offices or individuals without affecting its validity.
Lock-in Period: The maturity period for National Savings Certificate is fixed at 5 years.
Premature Withdrawal: Withdrawal before maturity is permitted only in exceptional circumstances such as the investor’s demise or a court order.
Power of Compounding: Interest earned on NSC is compounded annually and reinvested automatically. The accumulated amount, including principal and compounded interest, is payable at maturity.
Nomination Facility: Investors can nominate family members, including minors, to inherit the NSC in case of unforeseen events like the investor’s demise.
TDS Applicability: No TDS (Tax Deducted at Source) is deducted on NSC payouts. However, investors are liable to pay taxes on the interest earned while filing their Income Tax Returns (ITR).
Loan Collateral: NSC certificates can be used as collateral security to obtain loans from banks or NBFCs. The process involves transferring the certificate to the lending institution, which stamps the transfer for security purposes.
Physical and E-Certificate: Effective from April 1, 2016, NSC is available only in electronic form (e-mode). Existing physical certificates are no longer issued.
Transfer of Certificate: Transfer of NSC certificates from one person to another is allowed only once, from the date of issue to the date of maturity.
Types of NSC
The National Savings Certificate (NSC) offers a structured savings avenue with specific guidelines and benefits:
Types of NSC Certificates: Initially, the NSC scheme included two types: NSC VIII with a 5-year lock-in period and NSC IX with a 10-year lock-in period. However, effective December 20, 2015, NSC IX was discontinued. Currently, only NSC VIII, with a 5-year lock-in period, is available for investors.
Eligibility Criteria: The NSC scheme is exclusively designed for residential individuals. Non-resident Indians (NRIs), Hindu Undivided Families (HUFs), trusts, and other entities are not eligible to invest in NSC.
Investment Objective: NSC appeals to individuals seeking capital protection and a guaranteed return. Interested investors can purchase NSC certificates at any post office, provided they comply with KYC norms.
Tax Benefits: Investments in NSC up to INR 1,50,000 annually qualify for tax deduction under Section 80C of the Income Tax Act. Interest accrued in the first four years is automatically reinvested, qualifying for fresh deductions under Section 80C. However, interest received at maturity (in the fifth year) is taxable according to the investor’s applicable income tax slab.
Documents Required for Purchase: To buy NSC, individuals must submit an NSC application form along with identity proof (such as PAN Card, Aadhar Card, Senior Citizen ID, or Voter ID), address proof (like Electricity Bill, Passport, Telephone Bill, etc.), bank statement with a cheque, and passport-size photographs.
Modes of Investment: Previously, NSC certificates were pre-printed by banks and post offices, but this practice has been discontinued. Currently, investors can opt for:
Electronic Mode (e-mode): Available to individuals holding a bank or post office savings account with internet banking facilities.
Passbook Mode: Certificates are recorded in a passbook or printed e-mode format, akin to a bank passbook.
What is the Premature Withdrawal Procedure of NSC?
Although the National Savings Certificate (NSC) typically has a lock-in period of 5 years, it does allow for premature withdrawals under specific circumstances:
Death of the Holder(s): If the investor passes away, or in the case of joint holders, the certificate can be withdrawn prematurely.
Court Order: Withdrawal can be permitted if mandated by a court of law.
Forfeiture by Gazetted Government Officer: If a Gazetted Government Officer orders forfeiture of the certificate, premature withdrawal may be allowed.
It’s important to note that withdrawing NSC certificates before completing 1 year results in receiving only the principal amount; no interest is paid. However, if withdrawn after 1 year, the investor receives the principal amount along with the accrued interest.
For the withdrawal process, the following documents are required:
NSC Original Certificate
NSC Encashment Form
Proof of identity
Nominee’s signature on the certificate (compulsory for minors, attested by a guardian)
In the absence of a nominee, the legal heir can opt for encashment using Form SB84.
In the event of the investor’s demise, the nominee can encash the certificate by submitting specific forms:
Annexure 1: Claim settlement application (registered at a post office)
Important Keyword: Income Tax, optimized, Tax Savings & Deductions.
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Sukanya Samriddhi Yojana (SSY): Features, Interest Rates, and Tax Benefits
Sukanya Samriddhi Yojana (SSY) is a government-supported savings scheme launched in 2015 under the “Beti Bachao Beti Padhao” campaign by the Ministry of Finance. It aims to promote financial security for girl children in India by encouraging parents to invest in their education and future wedding expenses.
The Sukanya Samriddhi Yojana (SSY) scheme, introduced under the “Beti Bachao Beti Padhao” initiative, is tailored to secure the future of girl children in India through systematic savings. Here are the key features, eligibility criteria, interest rates, and tax benefits associated with SSY:
Features of Sukanya Samriddhi Yojana (SSY):
Minimum Deposit: INR 250 initially, with subsequent deposits in multiples of INR 100.
Maximum Deposit: Up to INR 1,50,000 per year.
Mode of Deposit: Deposits can be made via cash, cheque, demand draft, or online transfer.
Account Operation: Guardians manage the account until the girl child turns 18. Afterward, the girl child assumes control.
Duration: The account can be opened anytime before the girl child turns 10. It matures after 21 years from opening or upon her marriage after turning 18. Deposits are allowed for 15 years, with interest accruing until maturity irrespective of further deposits.
Tax Benefits: Contributions qualify for tax deductions under Section 80C of the Income Tax Act. Additionally, interest earned and maturity proceeds are tax-exempt.
Account Deactivation: Failure to meet the minimum annual deposit requirement deactivates the account. It can be revived with a penalty of INR 50 per year along with the required minimum deposit.
Eligibility Criteria for SSY:
Parents or legal guardians can open an account in the name of a girl child under 10 years of age.
The girl child must be a resident Indian.
A family can open a maximum of 2 accounts for two girls. In the case of twins or triplets, additional accounts can be opened, but the maximum limit is 3 accounts per family.
Interest Rate:
The current interest rate for SSY as of Q4 FY 2023-24 is 8.2% per annum, compounded annually. Interest rates are subject to quarterly revisions by the government.
Tax Benefits:
Contributions up to INR 1.5 lakh per year are eligible for deduction under Section 80C.
Interest earned and the maturity amount are exempt from income tax, falling under the EEE (Exempt, Exempt, Exempt) category.
How to open an Account for Sukanya Samriddhi Yojana?
Opening and managing a Sukanya Samriddhi Yojana (SSY) account involves straightforward procedures at authorized banks or post offices across India. Here’s a comprehensive guide on account opening, required documents, withdrawal rules, closure scenarios, and account transfer:
Opening a Sukanya Samriddhi Yojana Account:
Location: Accounts can be opened at any authorized bank branch or post office branch.
Form Submission: Obtain the account opening form from the respective bank or post office, fill it out, and submit it along with:
Birth certificate of the girl child.
Identity proof for both the girl child and the parent/legal guardian.
Address proof of the depositor.
Deposit fee as applicable.
Verification and Activation: The submitted documents undergo verification, after which the SSY account becomes active.
Documents Required for Sukanya Samriddhi Yojana Account:
Account Opening Form
Birth Certificate of the Girl Child
Identity Proof (for both girl child and parent/legal guardian)
Address Proof of Depositor
SSY Withdrawal Rules:
Permitted Withdrawal Scenarios:
Marriage Expenses: For the marriage of the girl child after she turns 18 years old.
Higher Education: Upon completion of Xth grade by the girl child and attaining 18 years of age.
Withdrawal Limit: Maximum 50% of the account balance from the previous financial year can be withdrawn.
Withdrawal Options: Withdrawals can be made in a lump sum or in up to 5 installments, as per the requirement.
SSY Closure Rules:
Closure on Maturity:
The account matures when the girl child turns 21 years old or upon her marriage after 18 years. Application for closure, along with proof of identity and citizenship documents, results in the release of the account balance including interest.
Premature Closure:
In case of the unfortunate event of the girl child’s death, the guardian can close the account with accumulated interest upon providing the death certificate.
Withdrawals are also permissible in scenarios such as medical treatment, marriage (within specified timelines), or change in citizenship/residential status.
Transfer of SSY Account:
SSY accounts can be transferred seamlessly from one part of the country to another. To initiate the transfer:
Fill out the account transfer form.
Submit it to the relevant post office or bank where the account is currently held.
Important keyword: Income Tax, Tax Saving Investment, ULIP, ULIP Benefits.
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ULIP (Unit Linked Insurance Plan): Meaning, Types, and Tax Benefits
Individual investors are constantly seeking investment avenues that offer both protection against uncertainties and opportunities for high returns. One such avenue is the Unit Linked Insurance Plan (ULIP), which blends insurance coverage with investment opportunities. A portion of the investment goes towards life insurance coverage, while the remaining amount is invested in various funds. These funds can be equity-oriented, debt-oriented, or hybrid in nature, depending on the investor’s risk appetite and financial goals.
The inception of ULIPs dates back several decades. The Unit Trust of India (UTI) introduced the first ULIP in 1971, marking a significant milestone in the Indian financial landscape. Following UTI’s initiative, the Life Insurance Corporation of India (LIC) introduced its own ULIP in 1989, further expanding the availability and popularity of this investment-cum-insurance product.
What is ULIP: Full Form and Meaning?
ULIP stands for Unit Linked Insurance Plan, which offers a unique blend of insurance and investment opportunities. It addresses two primary concerns for investors:
Insurance Coverage: ULIP provides life insurance protection, ensuring financial security for your loved ones in case of unfortunate events like death.
Investment Growth: A part of your ULIP investment is directed towards various funds such as equity, debt, or a mix of both, depending on your risk appetite and financial goals. This allows your money to potentially grow over the long term through market-linked returns.
ULIPs also offer tax benefits under Section 80C of the Income Tax Act, allowing you to reduce your taxable income by the amount invested in the plan. The Insurance Regulatory and Development Authority of India (IRDAI) oversees ULIPs to ensure transparency and fairness in their functioning.
Recent updates in the 2021 budget have made ULIPs subject to taxation if the annual premium exceeds INR 2.5 lakh in any given year of the policy term. This change aims to align ULIPs with other investment instruments in terms of tax treatment.
How Unit Linked Insurance Plan Plans Work?
ULIPs, or Unit Linked Insurance Plans, provide a unique opportunity for individuals to secure life insurance coverage while also investing in various market funds such as stocks, debt instruments, or a combination of both. When you pay a premium towards a ULIP, a portion of it is allocated to investment funds based on your risk tolerance and financial goals, while the remainder goes towards providing life insurance coverage.
The invested portion of the premium enters the equity markets or other investment avenues as managed by fund managers employed by the insurance company. Their role is to monitor and manage these investments to potentially yield returns over time.
One of the key advantages of ULIPs is their flexibility. Policyholders have the option to switch between different types of investment portfolios, such as debt-oriented or equity-oriented funds, depending on market conditions and their investment strategy. This flexibility allows investors to optimize their returns by adjusting their investments when market opportunities arise.
What is the Lock-in Period?
The lock-in period of a ULIP typically spans five years, during which policyholders are advised to consider holding onto their investment for at least fifteen years. This recommendation stems from ULIP’s dual nature as both insurance and investment, with both components intended for long-term growth.
What are the different types of Unit Linked Insurance Plans?
In India, ULIPs offer a variety of plans tailored to suit different risk appetites and financial goals. These plans are categorized based on their investment strategies:
Fund-based ULIPs:
Equity-Oriented Funds: These ULIPs primarily invest in high-risk equities, aiming for substantial growth over the long term.
Debt-Oriented Funds: Here, ULIPs focus on investments in less risky debt instruments like bonds and securities, offering stability with moderate returns.
Balanced Funds: Combining equity and debt investments, balanced ULIPs aim to strike a middle ground, offering a blend of growth potential and stability.
Cash Funds: These ULIPs invest in cash equivalents and low-risk money market instruments, providing stability and liquidity.
Based on Wealth Creation:
Guarantee/Non-Guarantee: Guaranteed ULIPs prioritize capital preservation by limiting exposure to equities, whereas non-guaranteed ULIPs focus on maximizing wealth creation through higher equity allocations, albeit with higher risk.
Single-Premium and Regular Premium: Single-premium ULIPs require a one-time premium payment at inception, while regular premium ULIPs allow for periodic payments (monthly, quarterly, etc.).
Life Stage-based ULIPs:
These plans adjust the investment mix based on the policyholder’s age and risk tolerance. They typically shift towards safer investments like debt instruments as the policyholder grows older.
Based on End Use of the Fund:
Wealth Creation: These ULIPs aim to build a substantial corpus over time to meet future financial goals.
Funding Children’s Education: Designed to secure funds for children’s education expenses and unforeseen financial needs.
For Retirement: Retirement-focused ULIPs aim to accumulate a retirement corpus that can provide financial security during the policyholder’s retirement years.
Each type of ULIP offers distinct features and benefits, catering to diverse financial objectives and risk preferences. Understanding these categories can help individuals make informed decisions aligned with their long-term financial goals and risk appetite.
Taxation on Unit Linked Insurance Plans
Investing in ULIPs offers a blend of life insurance coverage and investment opportunities, making it a versatile financial tool. Here are some key benefits of investing in ULIPs:
Life Insurance Coverage: Unit Linked Insurance Plans provide the dual benefit of life insurance along with investment growth. This ensures financial protection for your loved ones in case of unfortunate events.
Flexibility: Market conditions can fluctuate, affecting investment returns. ULIPs offer flexibility by allowing investors to switch between different fund options (equity, debt, balanced) based on market dynamics and their risk appetite. This feature helps in optimizing investment performance over time.
Long-Term Goals: Unit Linked Insurance Plans are designed for long-term investment horizons, typically with a lock-in period of 5 years. This makes them suitable for achieving significant financial goals such as children’s education, marriage, or buying a home. The longer investment duration allows for potential market-driven growth and compounding benefits.
Tax Benefits: Investors can avail tax benefits under Section 80C of the Income Tax Act, 1961, on the premium paid towards ULIPs, up to a maximum of INR 1.5 lakhs in a financial year. Additionally, before the 2021 budget changes, ULIPs fell under the EEE (Exempt, Exempt, Exempt) category, where not only premiums but also maturity proceeds were tax-exempt under certain conditions. However, post-2021, certain ULIPs are subject to capital gains tax similar to equity-oriented mutual funds if certain thresholds are exceeded.
Investment Discipline: ULIPs encourage disciplined savings and investment habits due to the mandatory lock-in period. This can help investors stay committed to their financial plans and avoid impulsive decisions based on short-term market fluctuations.
Unit Linked Insurance Plan vs Mutual Fund
Mutual funds and ULIPs have long been regarded as two of the better-performing assets for wealth creation. A comparison between ULIP & Mutual Funds is shown below:
Criteria
ULIPs
Mutual Funds
Scope
Investment as well as insurance product
Investment product
Withdrawal
There is a lock-in period of 5 years as it is a long-term investment
Anytime withdrawal
Liquidity
Limited liquidity
High liquidity
Tax Benefit
Tax deduction under section 80C
No tax benefits
Switching between funds
Altering between funds is permissible
Switching is not permissible; the only way to reduce the risk is to exit which may lead to capital gains tax
ULIP vs ELSS
Criteria
ULIP
ELSS
Tax Benefit
A deduction can be claimed under section 80C
A deduction can be claimed under section 80C
Taxation
Gains more than INR 1 lakh in a given financial year are taxable under LTCG @10%
Charges are simple and easy to understand: Approximately, on average Expense Ratio ranges from 1.05% to 2.25%
Lock-in period
5 Years
3 Years
Risk
High Risk
Moderate Risk
Underlying Asset
Equity, Debt, and Balanced
Equity
Charges
Below are the major charges associated with Unit Linked Insurance Plan: Mortality Charge, Premium Allocation Charge, Switching Charge, Surrender Charge, Policy Administration Charge, etc.
Charges are simple and easy to understand: Approximately, on an average Expense Ratio ranges from 1.05% to 2.25%
Important Keyword: Chapter VI-A, Income Tax, Section 80C, Tax Savings & Deductions.
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Proofs for Income Tax Declaration
The HR Department at your company is gearing up to send out emails requesting that you submit proofs for your Income Tax Declaration with the new year approaching. Employees must submit investment proofs and income tax declarations so that the employer can correctly deduct the right amount of TDS (Tax Deducted at Source). It’s important to know what investment proofs need to be provided to your employer. These details are to be submitted using Form 12BB.
Major Sections to Claim Income Tax Declaration
Income tax declaration involves claiming deductions to reduce taxable income, thereby lowering the tax liability. Here’s a breakdown of major sections and what they cover:
Section 80C:
Under this section, you can claim deductions up to INR 1,50,000 by investing in:
Life Insurance premiums
ELSS/Mutual Funds (Tax Saving)
PPF (Public Provident Fund)
Principal repayment of Housing Loan
Children’s Tuition Fees (for up to 2 children)
Fixed Deposits (Tax Savings)
Unit Linked Insurance Plans (ULIPs)
NSC (National Savings Certificate)
Sukanya Samriddhi Account
Deferred Annuity Plans
NHB deposit schemes/pension funds
Section 80CCC:
This section allows deductions for contributions to Pension Plans.
Section 80D:
Deductions are available for:
Medical Insurance premiums for self, spouse, children
Medical Insurance premiums for parents (higher deduction if parents are senior citizens)
Section 80DD:
Offers deductions for expenses on dependents with disabilities.
Section 80U:
Provides deductions for expenses on own disabilities.
Section 80DDB:
Deductions for treatment of specified diseases.
Section 80G:
Donations made to specified trusts are eligible for deductions.
Section 80E:
Interest paid on Education Loans can be claimed as deductions.
Section 24(b):
Interest on Housing Loan can be claimed, subject to specified conditions.
House Rent Allowance (HRA):
Provides deductions on rent paid, subject to certain conditions.
Section 10(5):
Leave Travel Allowance (LTA) deductions are available for travel expenses within specified limits.
Section 17(2):
Medical Reimbursement deductions are available for medical expenses.
Important Keyword: Income Tax, SCSS, SCSS Benefits, Tax Savings & Deductions.
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Senior Citizen Savings Scheme
Senior citizens hold a special place in Indian society, and it is crucial to ensure they have a reliable income during their retirement years. To address their financial needs, the government introduced the Senior Citizens Savings Scheme (SCSS) in 2004. This scheme provides a secure investment option with attractive interest rates and tax benefits, specifically designed for elderly individuals.
The SCSS offers senior citizens a dependable source of income and helps them manage their finances efficiently after retirement. With its government backing, the scheme guarantees both safety and returns, making it an ideal choice for those seeking financial stability in their later years. The attractive interest rates ensure that senior citizens can enjoy a steady income, while the associated tax benefits further enhance the appeal of this scheme.
What is the Senior Citizens Savings Scheme?
The Senior Citizens Savings Scheme (SCSS) is a dedicated retirement savings plan aimed at ensuring the well-being of senior citizens post-retirement. This scheme provides stable returns to its account holders, and with government oversight, the risk of capital loss is minimal. Resident Indians can take advantage of SCSS by opening an account either at the Indian Post Office or through certified public and private banks. This accessibility makes it a convenient and secure option for senior citizens seeking reliable income during their retirement years.
Eligibility for SCSS
Residents of India can invest in the Senior Citizen Savings Scheme individually or jointly with their spouse if they meet the following criteria:
Age Requirement: Indian residents aged 60 years or above.
Voluntary Retirement Scheme: Individuals aged 55 to 60 who have opted for the Voluntary Retirement Scheme.
Defence Personnel: Retired Defence Services personnel (excluding Civilian Defence Employees) aged 50 years or above, subject to specific conditions.
Note: Non-Resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not eligible for this scheme.
Features of SCSS
Minimum and Maximum Deposit Limits
Minimum Deposit: INR 1,000
Maximum Deposit: INR 30,00,000
Deposits must be in multiples of INR 1,000.
Cash deposits are limited to INR 1 lakh, whereas deposits above INR 1 lakh must be made via cheque or demand draft.
Maturity and Withdrawals
Maturity Period: 5 years, extendable by 3 more years if applied within 1 year of maturity.
Premature Withdrawals: Allowed after one year. No charge for closure within one year.
After 1 year but before 2 years: 1.5% penalty on the deposit amount.
After 2 years but before 5 years: 1% penalty on the deposit amount.
Accounts can be transferred between banks and post offices.
Number of SCSS Accounts
Multiple accounts are allowed individually or jointly with a spouse, provided the total sum does not exceed the maximum limit. The initial depositor must be the account holder.
Nomination Facility
A nominee can be designated when opening the account or later. The nominee is eligible to receive the due amount if the account holder passes away.
Interest Rates for SCSS
Current Interest Rate: 8.2% per annum (applicable from January 1, 2024, to March 31, 2024).
Interest is compounded quarterly and paid on the first day of April, July, October, and January.
Example of Maturity Value Calculation
Ajay’s Details: Age 62, deposits INR 10 lakhs on January 1, 2024.
Income Tax Benefits: Deduction up to INR 1.5 lakhs under Section 80C for those opting for the old tax regime. However, the interest earned is taxable as per applicable slabs, and TDS applies if the interest exceeds INR 50,000 in a year.
High Interest Rates: Currently at 8.2% per annum.
Premature Withdrawals: Allowed with specified penalties.
Transferability: Accounts can be transferred across any post office or bank in the country.
How to Open an SCSS Account
You can open an SCSS account at a post office or a public/private bank. Required documents include:
Age proof (Birth Certificate, Senior Citizen Card, Voter ID)
Two passport-size photographs
Form-A (available from the Department of Posts)
Banks Offering SCSS Accounts
Public Sector Banks: Andhra Bank, Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce, Punjab National Bank, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of India, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India, Vijaya Bank.
Private Sector Banks: IDBI Bank Ltd., ICICI Bank Ltd.
