We spend first quarter of the year
trying to understand ways to save taxes. Most financial advisors with a
forward-looking mind-set, would advise you to map tax-minimizing options while
maximizing your investment options. In this blog, we share how to ear invest
your money in the right tax saving options, so that your money helps you earn
more money, thereby lowering your tax burden
Here are 5 smart tax saving options for
you to invest in:
Equity-linked Savings
Schemes (ELSS)
This financial instrument allows you to
invest in diversified mutual funds with a tax benefit under Section 80C of the
Income Tax Act. You can avail a benefit by investing up to Rs. 1.5 lakhs.
However, the scheme also comes with a minimum lock-in period of 3 years. One
important thing to remember is that the dividend to the investor is not on the
basis of company profits but is rather based on the NAV (Net Asset Value). It
is estimated by dividing all the assets and removing all the liabilities.
One word of caution, starting last
financial year, you will have to pay 10% tax on dividends earned through Mutual
funds, which are known as dividend distribution tax on earnings. Although,
there are no assured returns, generally the rule of thumb is that if you invest
in long-term mutual funds, you do end up making profits.
Public Provident Fund
PPF or Public Provident Fund has been a
safe bet for plenty of financial investors ever since it was introduced fifty
years ago in 1968. What makes it so reliable is the fact you get assured
returns on the principal as well that interest amount. PPF offers 8 percent
interest per annum, which gets revised every 3 months. There is a lock-in
period of 15 years, which means you can expect good long-term investment
returns.
Another positive aspect of PPF is that,
you can open your account by depositing a minimum amount ofRs.500 to a maximum
cap of Rs. 1.5 lakhs a year. You can open your account easily by visiting your
nearest post office or bank branch. These days a few banks are even offering
PPF online. It’s perfect for long-term players who want to invest and forget
about the constant volatility of the equity markets. Though, we’d recommend a small
chunk in the equity market for higher returns and investments.
Employees Provident
Fund
With a large chunk of the workforce
being salaried in India, this is a perfect investment option for all employees.
How does it work? Basically, 12 per cent of the employee’s salary is deducted
every month for an EPF account, which is equally shared by the employer. At the
end of the employment term, the employee can withdraw this amount with interest
by intimating the employer.
As an employee, you can enjoy a tax
benefit of up to Rs. 1.5 lakhs per year. The latest interest rate on EPF
amounts to 8.55% for the financial year 2017-18. There is another type of
investment option called VPF, which is the Voluntary Provident Fund, wherein an
employee can increase his own contribution up to 100 percent of the basic
salary and Dearness Allowance (DA).
Unit Linked Investment
Plans
While some people prefer savings, others
favour investing in insurance for protecting themselves and their loved ones
for any contingency, emergency or death in the family. Unit Linked Investment
Option is a great combination of protection and savings for the future. In a
ULIP plan, a part of your investment is spent in various long-term market
assets and instruments while the other part is used for insurance.
That’s why the lock-in period for most
ULIP investment plans is usually 5 years or more. The duration for ULIP usually
lasts 15 to 20 years after which an investor can expect decent returns
depending on the growth of the equity market.
Word of caution
This type of investment is not
recommended for those who are looking strictly at insurance. That’s because it
involves certain market risks linked to equities and other instruments.
Which brings us to the
last point – Insurance Plans
Unlike traditional insurance plans,
there are now several types of investment plans like an endowment, money-back
and life-long insurance plans. which offer various types of returns to the
investor. All these come with a savings element based on a fixed term or amount
at end of the term. The premiums for these investment plans are based on the
age, period of the insurance plan and the life insurance coverage of the plan.
One great advantage of these insurance plans is that premiums are covered for a
benefit under Section 80C. Plus, the maturity or the death benefit is
completely tax-free.
The bottom line
So, when you are filing your taxes this year, make sure to choose between these 5 great tax-saving investment options and invest smartly.
Tata Capital helps you in making the most of your investment options, while having a tax-efficient portfolio, click here to know more.
08 January 2020
5 mins read
