What portion of your salary should you spend on loan EMIs?

In any investment portfolio, diversification is one of the key strategies to follow. The mix of equity and debt in any portfolio is always recommended. Just as balanced diet is the key to good health, a balanced portfolio is the key to stable wealth.

Debt instruments are generally considered safer investment options, but offer lower returns. Since many investors prefer guaranteed return, they invest in debt instruments such as PPF, NSC, FDs and debt mutual funds MFs in their portfolio.

Tax efficiency
Almost all instruments such as PPF, NSC, SCSS and FDs of certain tenure are tax efficient. These investments offer deduction under section 80C of the Income tax Act. When choosing a debt product, financial planners suggest that one should check out the tax efficiency of the product. Since the returns are lower, investors can enjoy tax benefits.

Debt mutual funds
Debt mutual funds generally offer up to 10% return. These funds are appropriate to meet short-term goals and have a low-risk ratio.

When you withdraw your debt mutual fund units within a three-year investment window, short-term capital gains tax is levied. This income is applied to your taxable income and taxed as per your tax slab rate.

Under section 111A, short-term capital gains on debt mutual fund are taxed at the same rate as regular income. Long-term capital gains on debt maintained for more than a year are levied at a rate of 20% under section 10 (38).

PPF
Public provident fund is one of the best instruments in terms of tax efficiency since the entire money – the principal, interest and the entire amount on maturity – are tax free.

The interest rate offered by PPF is 7.1%. Individuals with the lowest risk appetite can consider investing in PPF for a 15-year term or more.

Fixed deposit
Fixed deposit in bank and post offices are one of the best options, especially for the seniors.

There are 5-year tax saving FDs as well as shorter and longer term FDs offered by banks and post offices. The 5-year FDs come under section 80C of Income Tax Act.

Apart from these, interest earned from FDs is not tax free.

In the case of senior citizens, if the interest earned in a year exceeds Rs 50,000 in the case of senior citizens and Rs 40,000 in the case of non-senior citizens, banks are allowed to cut the TDS at a rate of 10%. If you do not offer PAN to the bank, the TDS goes up to 20%.

You can submit Form 15G/15H if your gross income for the year is less than Rs 2.5 lakh. In that case the bank won’t deduct taxes.

Senior citizen savings scheme
The Senior Citizens Savings Scheme (SCSS) is a secure debt instrument only for those who are above 60 years of age.

The interest rate on the SCSS for the first quarter (April-June) of FY 2021-22 is 7.4% per annum. It is one of the highest interest rates among other small savings schemes. SCSS is liable for a tax deduction of up to Rs 1.5 lakh per year under section 80C of the Income Tax Act.

If net interest in all SCSS accounts in a fiscal year crosses Rs 50,000, the interest becomes taxable and TDS is deducted from the overall interest earned.

One can submit form 15G/15H to avoid tax deduction.

National savings certificates
The five-year National Savings Certificate is a popular investment option for risk-averse investors. It currently offers an interest rate of 6.8% compounded annually but payable at maturity.

The deposits qualify for tax rebate under section 80c of the IT Act. And as the interest earned on the NSC every year is not paid out to the subscriber but is reinvested, the interest amount is also eligible for tax benefit under section 80C.

As the final year’s interest cannot be reinvested, an investor will have to pay tax at his marginal rate on that one year’s interest earned. The interest income will have to be shown in the income tax returns and tax paid on it accordingly.