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Medium & Long-term Options

These options typically offer low or virtually no liquidity. They are, however, largely useful as income accumulation tools because of the assured interest rates they offer. These instruments (small savings schemes) should find place in your long-term debt portfolio.

These options typically offer low or virtually no liquidity. They are, however, largely useful as income accumulation tools because of the assured interest rates they offer. These instruments (small savings schemes) should find place in your long-term debt portfolio.

a) Employee Provident Fund (EPF): PF will also be counted as your debt component which can be maximized to 20% of your basic salary; the company contributes another 12%. The contribution will yield a return of 8% and will be eligible for tax benefits under Section 80C.

b) Public Provident Fund (PPF): A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower. However, it doesn’t score too well on liquidity. PPF is a great investment if you have age on your side so that you can maximize the benefit by extending the period of holding.

c) National Savings Certificate (NSC): While the interest component gets accrued (deemed to be reinvested), it is returned to you along with the principal only on maturity. Hence the returns are both fixed and assured. Investments up to Rs.1,00,000 are eligible for deduction from income under Section 80C. However interest earnings are fully taxable. Premature encashment is only allowed under specific circumstances such as death of the holder, forfeiture by the pledge or under court’s order.

d) Kisan Vikas Patra (KVP): Liquidity in KVP is available any time after 2.6 years from the investment date, but a loss of interest has to be borne on premature liquidation. The interest earned is fully taxable as per your tax slab rate.

e) Post Office Time & Recurring Deposits (POTD): You can exit a POTD within six months of starting one without receiving any interest and if with-drawn after one year then 2 percentage points are deducted. There are no tax benefits in this scheme.

 

f) Post Office Monthly Income Scheme (POMIS): Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely.

g) Senior Citizens Savings Scheme (SCS): The tenure is 5 years and can be extended by another 3 years. Liquidity is available after one year but it proves costly as there is a penalty of 1.5% of the amount deposited. No tax break and now you need to pay TDS too.

h) Bank Deposits: These are flexible, liquid and offer good interest rates today. Make use of the two-in-one savings accounts that banks offer (surplus over a specified sum is transferred to a deposit) to get a higher return on the money accumulating in your savings account. In the recent Budget, the benefit of Section 80C was also extended to bank deposits, which are kept with scheduled banks for a minimum period of five years. The notification for this is yet to come.

 

 

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