Invest Wisely, Save Tax

Invest Wisely, Save Tax

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

With less than five months to go in the current financial year, one of the key issues facing taxpayers is how to invest to save taxes. Many investors err by investing haphazardly towards the fag end of the financial year. More often than not, it compels them to compromise on their financial future. The most common tax-savings instruments that are favoured by investors under such circumstances are traditional insurance plans, five-year fixed deposits and Public Provident Fund (PPF). If you are one of those taxpayers who has not yet initiated this process, it’s time to do so without any further delay. You must begin the process by asking yourself a few questions. How much tax are you supposed to pay?

How much tax can you save? How much investment are you supposed to make to save taxes? Once you have answers to these questions, the next step would be to select the right options out of those that are eligible under Section 80 C and its various sub-sections. Before looking at the right way to select tax-saving investment options, let us understand more about the provision of Section 80 C and its various sub-sections. Under these sections, a deduction of Rs1,50,000 can be claimed by investing in various options.

These include Employees Provident Fund, Public Provident Fund, life insurance premium, Equity Linked Savings Scheme (ELSS), stamp duty paid on purchase of a house, repayment of principal portion of home loan, National Savings Certificate (NSC), five-year tax-saving fixed deposit, Senior Citizen Savings Scheme, retirement funds of mutual funds, payment of education fees of children and National Pension System (NPS). Besides, an additional Rs50,000 can be invested in NPS under Section 80 CCD (1B).

While each of these investment options has its merits and demerits, a carefully chosen mix can not only save taxes but maximise gains for you. You must consider amounts already committed to options such as Employees Provident Fund, insurance premium or housing loan repayment before deciding how much to invest in other options such as PPF, ELSS and NSC, etc. In certain cases, contribution to EPF and hosing loan repayment may cover the entire rebate and hence no investment may have to be made for tax savings.

In such instances, you will have the flexibility to invest the surplus money as per your asset allocation in products without a mandatory lock-in period. Another important aspect is making tax-saving investments an integral part of your overall investment process. This not only allows you to choose the right asset class but also select options that have the potential to get you the best out of that asset class. For example, if you align your tax-saving investments with your long-term goals like retirement planning and children’s education, options like ELSS and select retirement funds of mutual funds will become an automatic choice.

In fact, ELSS has the shortest lock-in period amongst all options eligible for tax-savings as well as the potential to provide the highest returns over the longer term. Last but not the least, you must commit to start investing for tax-savings at the start of next financial year. There are a number of advantages of following this approach. For example, you will be able to stagger the applicable lock-in period.

Besides, investing through SIP on a monthly basis in options like ELSS and retirement funds offered by mutual funds will allow you to tackle volatility as well as benefit from ‘averaging’. Remember, keeping money aside every month through the year will help you avoid a situation wherein you may feel compelled to invest randomly at the end of the year.

 

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