6 Best Tax Saving Schemes

Along with the delight of entering a new decade comes anxiety for many inverstors who want to minimize their tax component while simultaneously maximize the returns that these investments will generate. One way to achieve both these objectives is by investing in Equity Linked Saving Schemes (ELSS). Though there is a plethora of tax-saving instruments available at the disposal of investors, very few of them are as attractive as ELSS. Other tax-saving instruments that are available in the same category and which offer the same tax benefits are National Savings Certificates (NSC), Public Provident Fund (PPF) and LIC policies among others.

Though investing in these instruments does offer the important benefit of tax saving, ELSS scores over them on two counts. First is the lock in period. Both PPF and NSC come with a relatively longer lock-in period (it is 15 years for PPF and six years for NSC). ELSS too comes with a lock-in period but with a lesser duration of three years. These schemes operate just like any normal equity diversified schemes as they need to invest 80 per cent or more of their corpus in equity and equity-related instruments. Nonetheless, the lock-in period of ELSS allows fund managers to take a longer term view of the market, which always gives a better return than any other investment avenue in the longer run without worrying about redemption pressures. A shorter lock-in period also offers investors the advantage of reinvesting the redeemed amount after three years in turn helping them manage their cash flows. What it means is that the units which have already completed the mandatory lock-in period of three years can be used to purchase fresh ELSS units from the redemption proceeds hence saving on any fresh commitment of funds and at the same time getting tax benefits.

Another way in which the ELSS’ have an advantage over other tax-saving instruments is the option of dividend distribution that all the schemes offer. Since most of the investment in ELSS is made in equity, which is very volatile and unpredictable, it is better to have a bird in hand than two in the bush. What it really means is that one should opt for the dividend option as it helps in booking profit from time to time and that in turn generates cash flow for the investor which can again be reinvested in these instruments or can be pocketed, depending upon an individual’s requirement of funds. This particularly helps in a scenario where the markets tumble very badly as had happened in 2008. Investors may recall that it was during this period that the total gains registered by investors during the preceding two years were entirely wiped out for those who hadn’t booked their profits. So far so good but what if someone needs the money before the completion of the mandatory three years? In such a situation one can redeem his/her units but the tax benefits enjoyed earlier on these investments become income for the year in which the units are redeemed.