It’s the month of March and most people would’ve just started thinking about investing for tax savings. Investing, however, is not an annual one-time transaction. It is a process and tax planning is only a part of it. Planning may not make your tax liability zero, but it can certainly reduce your overall liability.

There many provisions to save taxes and Section 80C of the Income Tax Act is very popular amongst the tax savers where a deduction of up to Rs. 1 lakh from the taxable income can be availed of, if invested in certain approved products.

PPFs are popular option since investors find the 8% tax-free return attractive. However, this comes at a cost of 15-year tenure and relative liquidity – one can avail loan from PPF account subject certain conditions. PPFs can be ideal investment if you are looking to build a corpus for long term needs like retirement or your children’s education. Let us look at the power of compounding here. If a 30-year-old invests Rs.70,000/- p.a for 15 years and leaves the money for his retirement, he will observe that he has a corpus in excess of Rs.75 Lakhs at the time of retirement. It should be noted that the returns are assured but not fixed. This is because the rate of return is subject to revision i.e. it can be revised upwards or downwards thereby impacting the returns.

Unit linked Insurance Plans (ULIPS) are insurance plans that offer a combination of investment and insurance. These however, come at high cost. Equity linked Saving Scheme (ELSS) are tax saving plans offered by mutual funds. These plans offer the dual benefit of growth with tax savings and have the lowest lock-in-period of 3 years compared to their competitors. On an average, ELSS generated 21% returns over 5 years period. However, the returns are not assured and as these plans invest in equity markets, the risk return profile is akin to that of equities. The returns here are tax-free since long-term capital gains tax on equities is nil. As mentioned earlier, to create wealth, it is important to maximise real returns, and equities historically have been the highest wealth creators. For people who have a limited time to submit proof to their offices, this could be amount the easiest options.

In addition to the above avenues for salaried employees, contribution to the Employers Provident Fund is also eligible for tax deduction under section 80C. Investors should explore the possibility of increasing their contributions under the Employers Provident Fund Scheme, if the same is permitted by their employers. This could be a great retirement planning tool – a natural monthly tax-saving option. Homeowners who have bought a home by taking a loan can enjoy the dual benefits of the principal repayment being deductible under Section 80C and additionally, the interest repayments are deductible under Section 24 upto Rs.1.5Lakh.


Like it on Facebook, Tweet it or share this article on other bookmarking websites.

No comments