At a time when both equity and debt have generated below average returns, it has become tricky to invest for tax savings. So, before you decide where to invest to save tax before March 31, understand why you are investing and what your expectations are. An asset allocation will help you take tactical and strategic calls in the portfolio.
Most tax-savings related products are long-term investments. Equity-related investments could be for up to five years and debt related-investments could span for 15 years. Ideally, investors in equity should look at a horizon of three to five years. So, lay down your investment goals, the time horizon and anticipated returns and then reap the compounding benefits and save tax, too.
Equity investing: ELSS or Ulips?
While the Nifty gained 3.2% last year, the domestic equity market saw both extremes as the benchmark indices hit new peaks midway through the year, only to give up those gains towards the end. Around 85% of the actively traded stocks failed to create wealth for investors and midcap and smallcap stocks were the worst hit. Investors can expect markets volatility to increase this year because of general elections.
In equity, equity-linked savings scheme of mutual funds still remains the most preferred choice for investments related to tax-savings. However, last year the government introduced 10% long-term capital gains tax after one year on gains over `1 lakh. Being an equity-linked fund, there is no guarantee of returns as returns mirror the stock markets and the financial sentiment of the market in general.
These funds are open-ended and have a lock-in period of only three years, the shortest among all tax-saving options. Investors can invest through monthly systematic investment plan (SIP) and stagger the investment. By taking the SIP route, one can stagger the investments and reduce the risk. An investor can put as little as Rs 500 in ELSS, unlike other equity-oriented funds where the minimum investment is `5,000. Investors can get deduction of up to `1.5 lakh under Section 80C of Income Tax Act.
If one is looking for an insurance cover and investments, then consider unit-linked insurance plans (Ulips). Unlike long-term capital gains on equity-related products, income from Ulips is exempt from tax. Investors can get tax breaks on investments of up to Rs 1.5 lakh. However, Ulips come with a five-year lock-in period. Before buying a linked life insurance policy or ELSS for tax savings, understand your needs and whether the product is suitable or not. Or else, the portfolio will not be able to meet your financial goals.
NPS for nest egg
After the recent government’s decision to completely exempt tax on returns from NPS after maturity, it has definitely become an attractive long-term investment to build retirement corpus. A series of regulatory changes by PFRDA on NPS has made the retirement product not only the cheapest in terms of cost structure, but has given investors ample choice to construct his portfolio according to his risk appetite. Investors can now allocate up to 75% in equities in the active choice option. Higher equity exposure will benefit young investors as equity tends to give higher returns over a longer period of investment. All NPS investors have earned double digit returns in the past five years.
Tax-wise, subscribers of NPS also get an additional tax break of `50,000 under Section 80CCD (1b) apart from Rs 1.5 lakh tax exemption under Section 80C. Also, if an employer puts 10% of an employee’s salary in NPS, then that amount will also get tax exemption. On the other hand, investments in EPF and PPF also get tax deduction of `1.5 lakh under Section 80C. In NPS, 40% of the total accumulated corpus has to be compulsorily used to buy annuity at retirement and is tax-exempt. Now, only the monthly or quarterly annuity income from NPS is taxed.
Also read: Amitabh Kant says India needs to create 2-and-a-half Americas in the next 50 years; here’s why
Fixed returns: Look at PPF
Public Provident Fund is the most popular tax-saving instrument and the interest rate is linked to bond yields and may change every quarter depending on the bond yield.. For the quarter January to March this year, the interest rate is 8%. The maturity period of PPF is 15 years and one can withdraw money every year from seventh financial year from the year of opening the account. Deposits (minimum `500 and maximum `1.5 lakh a year) qualify for deduction from income under Section 80C and the interest is tax-free.
