Introduction:

It is not mandatory that all financial instruments deduct TDS (Tax Deducted at Source). There are certain investments where there is no TDS deduction as mentioned below with a detailed and precise comparison.

Investments without TDS:

1. Investments in ELSS funds.

ELSS stands for Equity Linked Savings Scheme, is a tax-saving mutual fund that invests at least 65% of their assets in the stock market.

Advantages.

  • They have the lowest lock-in period because of their equity exposure.
  •  These funds are best way to earn inflation-beating returns over the long-term period.

These tax saving mutual funds do not offer guaranteed returns while ELSS gives 12-15% returns over the long as it compounding interest.

Tax benefits.

  • All the gains done on the investment are held for more than one year and it becomes tax-free (capital gains tax).
  • Under Section 80C, the investment done up to amount Rs 1.5lakh in ELSS funds is exempted from tax.

2. Investments in Public Provident Fund (PPF):

PPF provides the guaranteed rate of interest i.e. fixed by the Finance Ministry in every fiscal year. But, withdrawals are tax-free after the period of 15 years.

Note: PPF do not allow the premature withdrawals, but the account holder can take a loan against the corpus in their PPF account.

Tax benefits.

  • The investment up to Rs 1.5lakh in PPF funds is exempted from tax, under Section 80C.
  • A tax break up to Rs. 1.5lakh under Section 80C is allowed for an employer’s contribution to the Employee Provident Fund (EPF) account.
  •  Deduction of TDS isn’t there.

3. Purchase of National Savings Certificates (NSC)

 TDS filing is not applicable on the NSCs in non-convertible debentures. This can be bought from a designated post office and comes with a lock-in period of 5 & 10 years and interest is compounded annually

Tax benefits.

  • NSCs are eligible for a tax benefit within the fiscal year they’re purchased.
  • Investments up to Rs 1.5 lakhs can save taxes under Section 80C.
  • No TDS deduction is there.

Drawbacks

  • The total amount of interest at the end of maturity period would be taxable.

4. Investments in Unit Linked Insurance Plans (ULIP):

ULIPs are a combination of insurance and investment where:

  • A small part of the Invested amount is used to provide insurance.
  • The remaining amount is invested in the stock markets.

ULIPs don’t offer guaranteed returns because some part is invested within the equity market.

Tax benefits.

  • Under Section 80C investments up to 1.5lakh are eligible for tax benefits.
  • No TDS deduction is done.

Must read: types of TDS certificate

Drawbacks.

  • The investor is not sure about the amount invested. And also on what basis the commissions and expenses are deducted from the invested amount.

5. Dividend from shares:

The dividend is received from the shares where is not any TDS deduction. The company pays the dividend distribution tax. Hence, it is tax free.

Under Section 197 the taxpayer can apply to for no TDS deduction (or TDS at a lower rate) if:

  • The dividend is covered by section 115-O.
  • The declaration is made in forms 15G or 15H.
  • The amount of dividend paid (or is probably going to paid) shouldn’t exceed Rs. 2,500 and paid by account payee cheque..

6. Non-Convertible Debentures:

There is no TDS deduction by the company if you invest in non-convertible debentures of corporate. Some NCDs are often bought through the stock exchanges like Shriram Transport, Manapurram Finance, Muthoot Finance (recently issued), and Religare etc. The interest earned is taxable and is added to the total income for the payment of income tax.

 

7. Zero coupon bonds:

Zero coupon bonds involve the issuance of the bonds at discount to the face value and are redeemed at the same value. Normally, the time period for these bonds is 10, 15 or even 20 years and hence, there is a large accumulation in this instrument.

8. Post Office Monthly Income Scheme (POMIS):

POMIS may be a post office scheme that gives a daily income monthly. This scheme is risk-free because the funds aren’t invested within the equity. You should open a joint account with your spouse to avail the maximum benefit of this scheme. It has a lock in period for five years. Also, the account are often opened for a private , two/three adults jointly and a minor with the assistance of a guardian. There is a separate limit of investment of Rs. 3lakhs for minors and this limit are not combined with the limit of guardian.

Investment.

  • The minimum Investment: Rs. 1,500
  • The maximum Investment: Rs. 4.5lakhs (single) and Rs. 9lakhs (joint)

Points to remember.

  • Premature closure of the account can be claimed after 1 year or for 3 years @ 2.00% discount.
  •  If the account is closed prematurely after three years a deduction of 1% is done.
  • There is no Tax rebate and no TDS is applicable.
  • The deposits are also exempted from the wealth tax.

 

Comparison of schemes: 

 

INVESTMENT RISK PROFILE INTEREST GUARANTEED RETURNS LOCK-IN PERIOD
ELSS FUNDS There isEquity-related risk 12-15% (can be expected) No 3 years of time period
PPF Risk-free 8.1% Yes 15 years
ULIP Equity-related risk 8-10% (expected) No 5 years
DIVIDEND FROM SHARE Equity-related risk is present It depends on the earning of the company No It depends on the company’s policy
NCDs It is Risk-free 8-11% (expected) Yes It depends on the company’s policy
ZERO COUPON BONDS Risk-free Nil
(usually it issued at deep discount)
No Short term: not more than 1 year
Long term: 10 to 15 years
POMIS Risk-free 8.4% Yes 5years

 

In case you are pretty confused about TDS Return Filing as a deductor, feel free to consult the experts at LegalRaahi. You can get experienced assistance with our TDS Return Filing Software which supports TDS on Salary payments (Form 24Q), Rent, Interest, Commission and other Non-salary transactions (Form 26Q), NRI (Form 27Q ) and TCS (Form 27EQ).