Come the month of February or March, salaried individuals are seen scurrying to submit proof of investments. Unfortunately, the wake-up call comes a little too late; only after a mail from the accounting department makes an appearance in their inbox. But it need not be that frantic. You just need a bit of planning to help save tax. Here is how you can go about it:
Pick the Right Investment Option
First up, choose an investment option that can help you build your wealth and save tax.
There are several options that can help you save tax. Some of them are fixed deposits (FDs), post office time deposit, National Savings Scheme, Senior Citizen Savings Scheme and Public Provident Fund (PPF). Under them, you can claim tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
Investments in life insurance policies and repayment on the principal component of one’s home loan also qualify for tax exemption.
But equity-linked savings scheme (ELSS), a tax saving mutual fund, has a clear advantage over other financial instruments. It has the shortest lock-in period. You can withdraw your investment in three years. This is far lesser than other tax-saving options.
|Instrument||Lock in period||Features|
|PPF||15 years||Tax-free returns|
|NSC||6 years||Interest taxable as per law|
|Post office time deposit||5 years||Interest taxable as per law|
|Bank fixed deposit||5 years||Interest taxable as per law|
ELSS: Tax-free returns with potential long-term returns
The ELSS has further benefits. Firstly, ELSS returns are completely tax-free, whereas bank fixed deposits and NSC returns are taxable (as illustrated above). Secondly, they are essentially equity-oriented funds. This means this fund has the potential to give you greater returns when compared to their peers. You may regard equity as volatile but if you follow the general pattern over decades, you’d notice that the risk factor usually flattens in the long-term. And because ELSS has a three-year lock-in period, the risk level generally goes down.
How to invest
Like any mutual fund, you can invest in an ELSS via a systematic investment plan (SIP). This allows you to invest for a minimum amount of Rs 500. The plus point is that you don’t need a lot of money to invest in them. ELSS, therefore, can be a good tax planning option for investors who are beginning or at the start of their careers as well. All you need to do is to visit a fund house’s website offering this plan.
The dos and don’ts
While ELSS are suitable and convenient, there are certain things you should be mindful of while investing in such tax-saving funds.
- DO begin investing in ELSS schemes at the beginning of your career. Tax planning never seems tedious.
- DO choose an ELSS scheme at the beginning of the year after adequate research. This will help you avoid breaking your head at the last minute.
- DO check the track record of the plan, the pedigree of the fund house offering such a scheme, the fund objective and whether it fits with your investment philosophy before choosing the right ELSS.
- DON’T judge an ELSS on the basis of six-month or one-year returns. Remember, it is a three-year mission of building wealth.
Now that you are wiser about ELSS benefits, tax planning will no longer be a grind for you!