TAX SAVING INSTRUMENTS Q.What is tax savingsTax savingsmeans that you pay a reduced amount of taxes, either because a particular type of investment income is taxed at a low rate or not at all, or because only a portion of the investment income is taxable.

Read more:http://www.finweb.com/taxes/tax-savings-or-tax-deferral-which-is-better.html#ixzz3fsOOzfDeQ. Types of tax saving instruments? ELSS funds ULIPs Public Provident Fund Voluntary PF SCSS NPS Bank FDs and NSCs Pension Plans Life Insurance PoliciesEquity Linked Saving Schemes ELSS or Equity Linked Saving Schemes are a kind of equity linked mutual funds. As they invest in equity or stocks, ELSS funds have the ability to deliver superior returns 14-16% over the long term. Thats a full 6-8% above inflation. This return is not guaranteed though but historical evidence suggest that these returns are achievable over the long term. ELSS funds have a lock in period of only 3 years the lowest amongst the options available. The return from ELSS funds is also tax free. You can investup toRs 150,000 in ELSS funds either as a lump sum or on a monthly basis (SIP) thereby spreading your investments over the course of the year. Disadvantage of ELSS is that you cannot withdraw your funds before the maturity date.

Public Provident Fund PPF is a good option if you are looking for an option with certain returns. YourPPF investments earn interest at a rate announced every year currently 8.7%. PPF return is therefore mostly at par with inflation. However, it is tax-free and you can do a lump sum or small regular investments. The duration of a PPF account is 15 years which is extendable by 5 years at a time. You cannot withdraw money from your PPF account except under certain conditions but not before 5 years. You can invest in PPF through a bank or Post Office. Ability to invest online is limited.

5 Year Bank FDsThis is a variant of the regular Bank FD with a 5 year lock in. They offer slightly higher interest rates compared to normal FDs (0.25-0.5% higher) but does not offer liquidity option- even premature withdrawal with penalty is not possible.The amount you can invest is limited to Rs 1,50,000. The interest you earn on your 5 year bank FD is fully-taxable and you will have to pay taxes on a yearly basis for the interest you earn for that period. TDS typically collected by banks is only 10% (20% in case you have not submitted your PAN) and if you happen to be in the 20 or 30% tax bracket, you need to pay the remaining interest while filing your IT returns.Post-tax, 5 year bank FDs are not particularly attractive- especially for people in the 20 and 30% tax brackets since the post-tax returns (6-7%) are typically lower than other tax saving investment options.National Savings Certificate (NSC)NSC interest rates are fixed in April every year. The current rate is 8.5% for 5 year lock-in NSCs, and 8.8% for 10 year lock-in NSCs.The interest accumulated is fully taxable. However, one key difference here is that the interest amount is not paid out to the investor. Instead, its re-invested in NSC and therefore can be considered as your investment in NSC for the subsequent year. Needless to say, this is complex.Investments up toRs 150,000 are eligible. You can invest in NSC via your local post office.Life InsurancePremiumThis was almost the default tax saving option for years However, over the last few years, most informed investors have learnt the perils of choosing this optionThere are 2 kinds of Life Insurance Policies: Pure risk also called term life which ensure a risk to the life of the insured Risk+ investment: which pay you back money over timeWhile pure risk life insurance is something everyone with a dependant must have, its not an investment. Life insurance is an expense- something you pay to ensure that your dependents are not left stranded should something unfortunate happen to you. Term life insurance is cheap and for a sum of about Rs 10000, you can purchase a cover of Rs 1 CrThe returns from and costs of investment oriented insurance policies are not transparent and usually not attractive. We wont go into length on this topic but suffice to say that you should not consider Life Insurance as a tax saving investment option.National Pension SchemeNational Pension Scheme is a lot like investing in mutual funds with its Safe, moderate and Risky options. The returns are not guaranteed.You cannot withdraw until 60 and the corpus amount must necessarily be invested in an Annuity. The withdrawals are also taxable.Contributions up toRs 150,000 are eligible for deduction under Sec 80C. You can invest via the specified list of NPS fund managers with points of presence operated through banks.However, given the restrictions that come with NPS, its not a recommended option.Pension FundsPension funds are designed to provide you an income stream post retirement. They come in two flavours: Deferred Annuity and Immediate Annuity.For deferred annuity plan, you invest annually until your retirement. Once you reach your retirement, you have can withdraw up to 60% of your accumulated corpus and have to re-invest the remaining in an annuity fund which will give you a monthly pension.When it comes to immediate annuity plans, you invest a bulk amount one-time and get monthly pension from the next month itself. You would typically use these to invest your retirement corpus.Pension funds are not very popular because of the sub-par returns (around 6%) that they give and the restriction they come with. Thats less than Indias inflation rate and not even half of what ELSS funds provide in the long run.Pension funds are offered by a number of providers. Contributions up toRs 150,000 are eligible for deduction.Senior citizens savings schemeThe senior citizens savings scheme is a product aimed at senior citizens to save tax. It can only be opened by people who are above 60 years old.There is a maximum cap of 15 lakhs and a lock-in period of 5 years. You may withdraw the money before subject to penalty as follows More than 1 year but less than 2 years 1.5% of deposit amount More than 1 year but before maturity 1 % of deposit amountThis scheme is offered via the post office. Investments up toRs 150,000 are eligible.EPF (Employee Provident Fund)For salaried employees, this is not necessarily an optional thing. You will need to follow your companys policy with some leeway available. However, a lot of people forget that the amount contributed to EPF is also eligible for 80C deduction.EPF is typically deducted from your salary every month and it includes 12% of your Basic salary + DA up to a maximum limit of INR 6500 per month (inclusive of the optional matching employer contribution).You can withdraw EPF when you change jobs. However, your accrued amount will be taxed as other income. If you withdraw EPF after 5 years, you do not attract any tax. Withdrawal after 5 years is based onqualifying criteria.The interest rate varies every year (for e.g. interest rate in 2010-11, was 9.5%, while in the previous five years it was 8.5%). For 2014-15, the interest rate is fixed at 8.5%.