It’s that time of the year again when you take stock of your tax liability and plan for the next financial year. And, like most tax payers, you must be wondering about ways to save taxes while earning high returns.
It’s that time of the year again when you take stock of your tax liability and plan for the next financial year. And, like most tax payers, you must be wondering about ways to save taxes while earning high returns. Insurance has always been the first choice for the salaried class to save taxes. Though buying life and health insurance does its bit to reduce your tax liability, there are better ways to generate long-term wealth.
“This is not to advocate that you should not buy insurance. The purpose of an insurance is to protect the insurer and the family from unforeseen financial crisis. The key to striking a balance is to buy a term insurance as it is cost-effective and use the rest of the money to invest in tax-saving instruments with high returns,” says Adhil Shetty,CEO, BankBazaar.
Let’s take a look at some of the investment options that can help you save taxes and generate wealth.
Public Provident Fund (PPF)
Among the fixed income instruments, PPF is one of the most tax-efficient ones, as the interest earned is not taxed and the deposits made towards the account can be claimed as tax deduction under Section 80C.
Currently it offers an interest rate of 8%. However, when you consider its tax-efficiency, PPF provides you higher returns than most other small saving schemes.
PPF, while not a liquid investment option, comes with immense flexibility, allowing you to invest any amount between Rs. 500 and Rs. 1.5 lakh in a year.
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“The tenure for investment is 15 years. Although, you can start withdrawing from the seventh year and also take a loan against it from the third year onwards under certain conditions. However, withdrawing your PPF investment is not recommended unless it is an emergency. This is an ideal long-term investment option with low risk and higher returns associated to it,” says Shetty.
Equity Linked Saving Schemes (ELSS)
ELSS, an open-ended mutual fund, is another tax-efficient instrument, as it offers tax exemption of up to Rs. 1.5 Lakh under section 80C. ELSS, by definition, being an equity investment option, all your capital gains from it are automatically tax-exempt due to its three-year lock-in period.
“The best-performing ELSS funds offer higher long-term returns compared to fixed income instruments such as PPF, bank deposits, government securities, corporate bonds, etc. Equities are known to beat every other asset in the long run. As per the CRISIL AMFI ELSS Performance Index for December 2016, the ELSS fund category has been generating average annual returns of 10.61% in the preceding 10 years,” informs Shetty.
However, the prospect of higher returns comes with a certain amount of risk, as the returns are dependent on several market factors.
The stock market in India, like other global peers, has experienced volatility in the last few years due to the Great Recession, inflationary pressures, policy paralysis etc., thus impacting investor returns.
ELSS comes with a minimum lock-in period of three years, thus ensuring that the savings remain untouched over the given period of time. This allows the time equities need to perform well.
National Pension Scheme (NPS)
The National Pension Scheme, an initiative by the government of India, is an option to save taxes under section 80C of the Income Tax Act.
NPS allows individuals to invest up to Rs. 50,000 per annum, which is exempted from taxes. NPS invests your money in a mix of equities and bonds and you can choose the proportion in which you want to allocate the fund.
If you do not have an allocation in mind, the scheme helps customers decide on the allocation of fund on the basis of their age and risk appetite.
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“The returns depend on the performance of the assets. Since the NPS investment instruments are different for different investors, the returns vary from 6% to 15% depending on the mix of equity and debt. While a higher investment in equity increases the risk factor and the potential for higher returns, higher investment in debt provides lower returns making it less risky,” says Shetty.
National Savings Certificate (NSC)
NSCs offer an interest of 8% for a five-year plan. The investment made in NSC is exempted from taxes and the interests earned are virtually tax free except for the interest earned in the last year. There is no upper limit on the amount that can be invested. You can also secure loans against the investment.
Sukanya Samriddhi Scheme
This scheme, launched by the Prime Minister of India, is aimed towards creating and maintaining an investment account for every girl child in the country. The interest rate on this scheme is 8.5%, which is higher than most other saving instruments. The investments made towards the Sukanya Samriddhi Scheme is tax exempted under Section 80C of the Income Tax Act.
Senior Citizens Savings Scheme
A savings scheme, designed for the senior citizens of India, is a long-term, tax-effective savings instrument, which offers returns of 8.5% per annum. Any investment made towards the SCSS scheme is exempted from taxes under Section 80C of the Income Tax Act.
If the interest earned from the investment is more than Rs. 10,000 per year, then tax is deducted at source. If the interest earned is less than this amount, it is tax free.