Halal Islamic Tax Saving Investments in India

This article is written by Fazeek Kazi and is an extract from his blog Islamic Personal Investing with little added / modified scheme list for tax saving plans. The article is solely his personal views concluding that there is no halal tax saving investment in India and written in January 14, 2012.

Halal Tax Saving Investments in India

This article only discusses tax saving through investments; it doesn't discuss about other tax saving options. There are ways to reduce taxes through deductions and I'll discuss the same in another article. Let me get straight to the point, I feel THERE IS NO HALAL TAX SAVING INVESTMENT IN INDIA.

You can continue reading further to know the reasons for the same. I am not even going into the stupid arguments that interest is allowed, small percentages are fine, interest in not usury, riba stands only for usury and not interest. Allah has given us brains to think and the Quran/ Sunna as a guide; every person is capable of investigating and finding out what is allowed and what is not.
Interest Based Investments

All these schemes are Interest based ones and hence obviously haram.

1.      PPF  (Public Provident Fund )

2.      SSY  (Sukanya Samriddhi Account)

3.      NSC/ NSS (National Saving Scheme/ Certificate)

4.      KVP (Kisan Vikas Patra)

5.      SCSS (Senior Citizens Saving Scheme)

6.      FD (Fixed Deposits) 

7.      TD (Post Office Time Deposit)

8.      Infrastructure Bonds

Insurance
Pure Life Assurance and Medical Insurance (for self and parents) is fine and a good tax deduction; but it is not literally an investment. You do not get any returns directly.
Most of the insurance schemes in India are investment based and none are halal. The following popular ones have Interest components:

1.      Guaranteed 

2.      Highest NAV

3.      Endowment

4.      Balanced

5.      Any of the Jeevan ****** from LIC

ULIP (Unit Linked Insurance Plan) 

These are somewhat similar to Mutual Funds and they can have Debt as well as Equity components. The Debt ones are obviously not allowed as that falls under Interest. The Equity one is also not allowed because of the following reason:

1.      You have no idea about which Stocks the insurance company invests the ULIP funds as they do not reveal where they have invested.

2.      Rest of the points are same as ELSS below.

Pension Schemes

Pension Schemes can take various forms and are usually from Government, Insurance Companies and Mutual Funds. However, all these are heavily into Interest based investing and hence not allowed.

1.      NPS (New Pension Scheme)

2.      ULPP (Unit Linked Pension Plan)

3.      Pension Fund from Insurances

4.      Pension Fund from Mutual Funds

ELSS (Equity Linked Savings Scheme)

Probably the most popular among Muslims as a non-interest based investment. Unfortunately this is not halal either. They do the following haram investments

1.      Although they are equity based, some portion (about 10-20%) will be invested in Debt instruments.

2.      Usually they invest a significant portion in shares of Financial Instituitions like Banks, NBFC, etc.

3.      There is nothing stopping them from investing in completely haram sectors like Alcohol, Sugar, Media & Entertainment, Tobacco.

4.      For capital intensive sectors like Infrastructure, Power, Machinery, Oil & Gas each company has to be evaluated carefully as many are heavily into debt all the time (i.e. paying huge amount of interests)

5.      Cash rich companies like IT, PSU's have huge amounts of idle cash often invested in Banks/ Bonds and other short-term investments. This pays them a good amount of interest income.

Even if you ignore the last 2 points; just go through the Investment Portfolio of any ELSS Mutual Fund and you will see that nearly 30%-50% comes under haram.

Home Loans

If you have taken a Home loan from a Bank/ NBFC, you are surely paying interest and by Shariaah both the interest payer and receiver are equally sinful. The only way this can be made halal for tax purposes is that you take a loan from your father/ mother or some close relative with 0% interest and just show to the government that you are paying them interest.
Compulsory Investments

The following are Tax Saving Investments for salaried employees and are usually compulsory; so you do end up forcefully investing in them.

1.      EPF (Employee Provident Fund)

2.      Superannuation.

Since they are forced over you, you can't do anything about it. However, whenever you resign you can withdraw the same.

Conclusion

So what do you do? It's simple you pay the Tax. What else can you do? It might be haram to pay such high levels of tax, since there is no basis in religion for such high taxes and much of the money doesn't get used up in the right way. However, to prevent one haram that is forced upon you, it is not right to willfully commit another haram by investing in non-Shariaah way. Allah knows best.

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How To Withdraw Your Money From PPF Account

Hour of the need is money for many people and even if they had made investment say, under section 80C of our IT Act, they are not clear whether they are eligible to withdraw their money after maturity or partially. The post will give a clear idea about PPF Withdrawal.

The PPF is a Central Government Scheme, which is a long term small savings scheme to provide retirement security to self-employed individuals and workers in the unorganized sector. PPF account can be opened in any branches of State Bank of India or its subsidiaries or select branches of designated nationalized banks or select Post Offices across India. How to open an account or rules is not a matter now. The point here is to withdraw on maturity or partial withdrawal from account or continuation of account after maturity with investment or earning interest without investment.

Consider the below chart with applicable PPF rules where Rs. 1,00,000 is deposited in a PPF account from the Year 2011 to 2028. Account holder can withdraw from PPF account after completion  after the expiry of 5 full financial years from the end of the year in which initial investment was made or say amount can be withdrawn after completion of 6 years.

In the above case, account holder can withdraw money from his / her PPF Account only at the end of 6th Year of operation, so its ideally 7th year beginning. The PPF Withdrawal Rules in states that the maximum amount of withdrawal from PPF Account is 50% of the amount retained / remaining in the PPF account in the end of 4th year. In the above example its Rs. 3,55,293.45 INR and 50% of this amount is Rs.1,77,646.73 INR and so the Withdrawal Rules in PPF continues till the end of 12th year of which the amount can be withdrawn during the 15 year end. So ideally in PPF Withdrawal Rules is valid from 7th year end to 15th year end.

On maturity, the account holder can decide to withdraw all the money which is exempted from tax. The account holder of PPF account can continue to invest in PPF Account after the completion of maturity period by extending his lock-in-period for block of 5 years. In-case, if the account holder chooses to extend the account without making any fresh contributions, the left over balance will continue to earn interest till it is withdrawn.

For clear information about PPF account opening and withdrawal rules, refer Rajesh Goyal's article on PPF account AllBankingSolutions.com and www.ppfaccount.in. 

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Changes in Provident Fund Rules

planning for retirement is as important as planning for one’s career and marriage. Everybody wishes to have a secure, independent retirement life, where you would not depend on others for your needs. Investments and allocations are accordingly channelized in this direction to achieve the desired goals. The Employee Provident Fund (EPF), Employee Pension Scheme (EPS) and Public Provident Fund (PPF) are some of the popular products to invest for the retirement years.

In the past few months, radical changes have been introduced in these schemes. Let us have a look at them.

1) PF portability: Every time you join a new company, you were given a new PF number. Then you had the option of moving your funds to the new account. Whether you did this or not affected the taxability of your PF deposits. Not any more. Your PF accounts are now going to be portable. The Prime Minister Narendra Modi is going to launch the much-awaited Universal PF Account Number (UAN) website to enable PF portability on October 16. The UAN will be portable throughout the working career of an employee. With the UAN in place, workers in the organized sector need not apply for transfer of PF claim in case of job-change. This means, the PF subscriber will not get a new number on joining a new firm. Instead the employee will get an ID linked to UAN. So, this mechanism will help in smoothening PF transfer claims. The new website is expected to provide an individual personalized log-in mechanism to help in tasks like viewing updated PF amount, transfer claims and updating KYC.

Currently, the EPFO is in the process of linking the UAN of its 40 million subscribers with their bank accounts, Permanent Account Number (PAN), Aadhar and other identification details.

2) Bank account and PF portability: The retirement fund body has asked companies to provide bank account numbers of their employer members by October 15. It has also asked for the IFSC or Indian Financial System Code number for easy transfer of PF payment. The IFSC helps identify the branch where the account is based. This helps transfer money easily. The bank account numbers with IFSC codes will be linked to the Universal PF Account Number (UAN). This will help in portability of PF accounts.

3) Higher PF wage ceiling: The retirement fund body Employee Provident Fund Organization (EPFO) has raised the salary limit for maintaining a PF account to Rs 15,000. Earlier, the limit was Rs 6,500 per month. This means, any organized sector employee earning up to Rs 15,000-a-month have to compulsorily hold an EPF account with the government. For those earning more than Rs 15,000, it is a voluntary option. This is to ensure that low-wage earners have a sufficient kitty to help them in their retirement. This new measure is expected to bring in 50 lakh new PF subscribers, according to the EPFO.

12% of an employee’s basic salary goes to the PF account and is payable back to him/her together with interest once he/she leaves the company. The employer too pays an equal sum – 12% of the basic salary. Out of this, 8.33% goes into the pension scheme and 3.67% into the EPF.

As of now, only organized sector employees are covered under the social security scheme. They amount to about 8% of the total workforce. This still leaves the majority of India’s workers in the unorganized sector without sufficient retirement help.

4) Minimum monthly pension: Once the EPFO subscriber dies, his or her family gets an amount on a monthly basis. The government has raised the minimum monthly pension distributed to Rs 1,000 per month for the financial year 2014-2015. This move will benefit about 28 lakh pensioners, especially widows, some of whom get a paltry sum of Rs 150-200 a month.

5) Insurance limit hiked: Maximum sum assured under Employee Deposit Linked Scheme, 1976 (EDLI) has been hiked to Rs 3 lakhs plus 20% ad hoc benefit over the prescribed amount. This means in case of the death of the subscriber under EPFO, his family is entitled to get Rs 3.6 lakhs instead of the current Rs 1.56 lakhs.

All employers to whom the Employee Provident Fund and Miscellaneous Provision Act applies, have to mandatorily subscribe to the EDLI scheme to provide life insurance benefit to their employees.

The above 3 changes have come into effect from September 1, 2014

6) PF interest rate: When you invest in a provident fund, you earn an interest. The government fixes this rate on a yearly basis. For the year 2014-15, the interest rate on provident fund deposits has been retained at 8.75%. This means, the nearly 50 million PF subscribers will earn 8.75% on their deposit amount this year.

7) Tax on PF withdrawal: If an employee withdraws his PF accumulation before five years of completing service, the entire amount withdrawn will be taxable for that year. However, if you transferred your PF every time you changed you job, your total tenure of work will be calculated. For example, if you worked for a year at company A and for four years at company B, and you transferred your PF, then a total work-period of five years will be calculated.


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