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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.

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.