InvestmentTax Saving

Best Investments For Tax Saving -Maximum Saving

By December 12, 2019No Comments

Hard-working professionals and businessmen are always on the lookout for the Best Investments  For Tax Saving in order to derive maximum benefits from their investments.  Investing in tax saving schemes not just reduces your tax liability but also help you meet various personal financial goals in your life. Learn how to save Income Tax in India as well as carry out your retirement planning by investing in the following tax-saving instruments.

Here we have listed some investment options hat will help you save tax

 

Best Investments For Tax Saving : Public Provident Fund (PPF) 

Started by the National Savings Organisation and promoted by the Government of India, PPF is a long-term (read 15 years) investment that you can use for goals such as your child’s education or your retirement. This investment falls under the Exempt-Exempt-Exempt (EEE) category. Public Provident Funds are Best Investments For Tax Saving if you are an employee

This means the investment you make, the income you will earn, and the maturity proceeds are totally tax-free. You can also claim tax benefits under Section 80C of the Income Tax Act for the amount that you invest. 

The minimum investment for PPF is just Rs. 500. You can invest up to Rs. 1,50,000 for a financial year. The Central Government fixes the interest rate for PPF along with rates for other savings schemes and the rates are revised every quarter.

Why is that?

Now, all savings schemes offered by the Department of Posts are linked to government securities’ prices. Since government securities are traded every day, their prices change constantly. However, savings schemes cannot be made volatile. Therefore, the rates are reset every quarter. The interest rate for PPF this quarter is 8%.  

Since the interest for your PPF account is compounded annually and the interest is tax-free, the effective yield on your investment will be much higher. If you are in the 30% tax bracket, the effective yield for your 8% PPF will be a good 11.6%.  

Employee Provident Fund (EPF) 

Just like PPF, EPF also enjoys the EEE status. This is only if you withdraw the money after retirement, of course! Premature withdrawal is tax-free if you have held the EPF account for 5 continuous years. The interest amount will also be tax-free. You can claim tax deductions under Section 80C for the amount invested.  Epf is also Best Investments For Tax Saving

You have to compulsorily contribute 12% of your basic salary towards EPF while your employer will contribute equally. EPF covers every company that employs 20 or more persons and the rate applicable for these companies is 12%. However, EPF rules state that certain organisations that employ less than 20 persons can contribute 10% under certain conditions and exemptions.  

You can also make voluntary contributions over and above this amount. How much can you contribute? You could invest up to 100% of your basic salary plus your dearness allowance in your EPF. All contributions that you make will earn interest at the same rate. The tax and withdrawal rules for these voluntary contributions will also be the same.  

Note that 8.33% of the employer’s contribution will be towards the Employees’ Pension Scheme (EPS). For every employee whose basic pay is Rs. 15,000 or more, Rs 1,250 will be invested in EPS. If the basic pay is less than Rs. 15,000, then 8.33% of the pay will be for EPS.  

The present rate of interest for EPF is 8.55% and is calculated based on your monthly running balance. Suppose you earn a basic salary of Rs. 50,000, your EPF balance at the end of one year will Rs. 1.29 lakhs given the present interest rate. If you include your EPS balance, it will be Rs. 1.34 lakhs. 

Now, EPF subscribers can withdraw 75% of their total account balance after one month of resigning from their job.  

Sukanya Samridhi Yojana (SSY) 

Have a girl child? Then, SSY is one of the best long-term investments that provide tax-free returns. The scheme’s interest rate is 8.1% now. The amount invested can be claimed as a tax deduction under Section 80C. The minimum deposit amount is Rs. 250 and you can invest Rs. 1.5 lakhs during a financial year. 

You can open an SSY account until your child turns 10. You can operate the account until she gets married or 21 years from the date of opening the account, whichever is earlier. You can make a partial withdrawal for your child’s education when she turns 18 years.  

From April 1, 2018 any LTCG made on transfer of equity MFs that have an equity exposure of 65 per cent or more including Equity-linked savings schemes (ELSS) will have to pay a 10 per cent tax on long-term gains. It is important to note that gains made above Rs 1 lakh per annum will only be subject to tax and any gains made below that limit in one FY remains tax-exempt. The LTCG made till January 31, 2018, however, remains grandfathered, i.e., those gains remains tax-exempt.

 

Best Investments For Tax Saving : Equity -Linked Saving Schemes

 

Equity-linked savings schemes (ELSS) are diversified equity mutual funds with two differentiating features – one, investment amount in them qualifies for tax benefit under Section 80C of the Income Tax Act, 1961, up to a limit of Rs 1.5 lakh a year and secondly, the amount invested has a lock-in period of 3 years. Every mutual fund (MF) house offers them and generally uses the word tax-saving in its name to distinguish them from their other mutual fund schemes. The returns in ELSS are not fixed and neither assured but is dependent on the performance of equity markets. Mutual funds are Best Investments For Tax Saving

One may opt for dividend or growth option in them. While the former suits someone looking for a regular income, although not assured, the latter suits someone looking to save for a long-term need.

However, dividend in an equity MF scheme (including ELSS) should not be construed as similar to the dividend received from an equity share. In the latter, the dividend is declared out of profits generated by a company while in a MF, it is out of the NAV. For a MF unit holder, receiving the dividend is merely equal to the redemption of units.

Further, the dividends in an equity scheme are now ( April 1, 2018 onwards) subject to dividend distribution tax of 10 percent. Hence, for someone investing in ELSS, choosing the growth option over the dividend option will yield tax-effective returns.

To mitigate risks, one may diversify across more than one ELSS scheme (based on market capitalisation and industry exposure) after considering their long-term consistent performance. After the lock-in ends, one may continue with the ELSS investments similar to any open-ended MF scheme. However, review its performance against its benchmark before doing so. Investing in ELSS not only helps you save for a long term goal but also helps you save tax and generate tax-exempt income.

One may opt for dividend or growth option in them. While the former suits someone looking for a regular income, although not assured, the latter suits someone looking to save for a long-term need.

However, dividend in an equity MF scheme (including ELSS) should not be construed as similar to the dividend received from an equity share. In the latter, the dividend is declared out of profits generated by a company while in a MF, it is out of the NAV. For a MF unit holder, receiving the dividend is merely equal to the redemption of units.

Further, the dividends in an equity scheme are now ( April 1, 2018 onwards) subject to dividend distribution tax of 10 percent. Hence, for someone investing in ELSS, choosing the growth option over the dividend option will yield tax-effective returns.

To mitigate risks, one may diversify across more than one ELSS scheme (based on market capitalisation and industry exposure) after considering their long-term consistent performance. After the lock-in ends, one may continue with the ELSS investments similar to any open-ended MF scheme. However, review its performance against its benchmark before doing so. Investing in ELSS not only helps you save for a long term goal but also helps you save tax and generate tax-exempt income.

Unit Linked Investment Plan

Unit linked insurance plan (Ulip) is a hybrid product, a combo of protection and saving. It not only provides life insurance but also helps channel one’s savings into various market-linked assets for meeting long-term goals.

In most Ulips, there are 5 to 9 fund options with varying asset allocation between equity and debt. A Ulip can have a duration of 15 or 20 years or more but the lock-in period is 5 years. The fund value on exiting the policy (allowed after 5 years) or on maturity is tax-free. Any switching between the fund’s options irrespective of the holding period is exempt from tax.

Whom does Ulips suit: Ulips may not be suitable for all investors. Those investors who are comfortable in identifying and managing the ELSS schemes and simultaneously hold a pure term insurance plan, need not buy Ulips. Also, investors looking at investing in Ulips should make sure that the goal for which the Ulip savings is to be used is at least ten years away. For someone to exit Ulip after 5-7 years could be financially damaging.

 

Best Investments For Tax Saving : Tradition insurance Plans

Traditional insurance plans could be an endowment, money-back or a whole life plan. Unlike pure term insurance plans they have a savings element in them and come with a fixed term and a fixed sum assured. The premiums are based on the age at the time of entry, the life coverage and the period for which coverage is required. Premiums are to be paid each year till maturity. Few such plans have a limited premium payment option in which premiums are to be paid only for a specified term but the policy continues for long. For example, a policy of 25 years may require premiums to be paid only for the first 5 or ten years. life insurance are Best Investments for Tax Saving

While the premium paid qualifies for tax benefit under section 80C, the maturity value and the death benefit is tax-free.

Where traditional plans fail: Traditional plans are inflexible in nature. The term once chosen can’t be changed. For someone who has started saving for say 20 years might need funds in the 16th or 19th year. Most such plans also do not allow partial withdrawals. Even sum assured can’t be changed. The traditional insurance plans including endowment, money back or of any design have a potential for lower returns and is largely in the range of 4-7 percent per annum.

Here is RBI’s circular on tax-saving bonds Check it out

so above we described Best Investments for Tax Saving select from them whatever best suits you and start investing

Leave a Reply