It is always better to plan your taxes in advance so that you can achieve the twin goal of maximizing wealth through investment and tax saving at once. Many a time, in an effort to save taxes at the last moment we end up buying such tax-saving instruments which are not useful in the long run. The investment agents try to sell the instruments which give them highest commission.

When you think of tax saving from point of view of a salaried person, Section 80C of the Income Tax Act 1961 is the first thing that crosses your mind. Section 80C provides various avenues to avail tax deduction on investment up to Rs. 1,50,000/-. One can avail additional deduction of Rs. 50,000/- u/s 80CCD(1B) and Section 80EE which is over and above the deduction u/s 80C. The popular avenues as mentioned above include Public Provident Fund (PPF), Employees’ Provident Fund (EPF), Equity Linked Saving Scheme (ELSS), National Pension Scheme (NPS) etc.

For reference, consider the table below.

NSC PPF EPF NPS Bank Deposit (FD 5-year) ELSS (5-year CAGR)
Returns (%) 7.6* 7.6* 8.65 Market-linked 6.25-6.5 19
Compounding Half-Yearly Yearly Yearly N/A Yearly Yearly
Lock-In Period (Years) 5 15 5 Until attainment of 60 Years of age 5 3 years to get tax free return.(Return mentioned above is of 5 yrs)
Taxation Taxable Tax-Free Partially Taxable Annuity Taxed Interest is taxed Tax-Free

*Rates for PPF and NSC are set every quarter.

Let us start with a simple stepwise guide to help you plan and save some taxes while making an informed investment at the same time. It consists of four steps as follows:-

Step 1

For a salaried person, EPF/VPF is the first step in tax savings. Interest earned up to 9.5% and employer’s contribution up to 12% of employee’s salary under EPF is exempt in the hands of employee. Employee can increase his contribution to EPF, such further contribution is called Voluntary Provident Fund (VPF). VPF is also eligible for deduction u/s 80C.

Step 2

Expenditures also save tax. To claim the deduction for a financial year amount should be expensed in that financial year only.  Expenditures on which you can claim tax deduction are:-

  1. Interest paid on education loan of self, spouse or children. (Section 80E)
  2. Medical insurance premium paid for self, spouse, dependent children and parents.(Up to Rs. 30,000) (Section 80D)
  3. Expenditure incurred on medical treatment of self, spouse, dependent children and parents. (Section 80DDB)
  4. Payment of House Rent (Section 80GG)
  5. Interest on home loan (Section 24(b))
  6. School/College fees paid- up to 2 children. (Section 80C)

Step 3

Before investment, you should first take adequate life insurance and health insurance policies. Premium paid for life insurance since 1st April 2013 is allowed for the tax deduction up to a maximum of 15% of sum assured. If the policy was issued before 1st April 2013, the premium paid up to a maximum amount of 10% of sum assured is allowed for tax deduction. Life insurance is very important for earning member of the family so as to ensure the support for dependants. Health Insurance premium paid for self, spouse and dependent children is allowed as tax deduction u/s 80D up to Rs. 25,000 and an additional Rs. 30,000 deduction is available in case the premium is paid for parents.

Step 4

After EPF, tax deductible expenses and insurance the remaining amount of tax deduction should be claimed through investment in instruments that are qualified for tax deduction. One route here goes through a less risky part (fixed income) and other through a comparatively more risky part (equity). Fixed Income options that save taxes include Public Provident Fund, National Savings Certificate, etc. Equity option includes Equity Linked Saving Scheme (ELSS), National Pension Scheme and Unit Linked Insurance Plans. ELSS is one of the most preferred option u/s 80C for tax savings. To get tax deduction under ELSS there is a lock-in period of 3 years. ELSS boasts of the highest return in long-term amongst other investment options that also save tax.

It is also very easy to invest in an ELSS. There are two ways to start investing in mutual funds. Offline way to invest involves the following steps:-

  1. Contact an agent or distributor of mutual funds or visit the local office of the mutual fund company for assistance.
  2. Complete the KYC (Know Your Customer) requirements and fill in an application form. It involves providing information like name, PAN number, address, phone number, email address etc.
  3. Submit the application form along with required documents and the cheque for the amount to be invested with the agent/distributor or mutual fund office.
  4. As soon as your application is processed, you will receive an account statement for the same which will include your folio number.

Online investment in mutual fund is rather simple and includes following steps:-

  1. Complete your KYC requirements: This will include a soft copy of documents like the cheque book, address proof, passport size photograph, PAN card. Aadhaar number will expedite the process. You can complete your KYC for free with the help of your Investment Advisor.
  2. Find the Right Portfolio and Invest- Finding the right portfolio for your needs is a difficult task unless you are an expert in Market. Groww is one such Company which helps investor in finding the right portfolio for their needs by providing personalized assistance and awesome customer support. Groww makes investing so simple that you can expeditiously start Your SIP or any other investment in Mutual funds.

Investment can be one-time or through Systematic Investment Plan (SIP), which can start from as low as Rs. 500/- a month. Remember that each SIP will be considered a separate investment and each such separate SIP should stay invested in ELSS for 3 years to claim the deduction.

In addition to the excess returns on ELSS scheme when compared to fixed deposits, another advantage on their side is that the returns on the same will be tax-free. In ELSS you can opt for growth or dividend option. In growth option, intermediate cash flows are reinvested and you receive a lump sum amount on your withdrawal and in dividend option you receive dividends as and when they are declared which are also tax-free.

In case of bank fixed deposits, the interest amount you receive on your investment is taxed at the slab rate applicable to your total income under the head ‘Income from other sources’. Banks also deduct TDS on the Interest income they pay you so while calculating your final tax liability remember to add the accrued interest income on your fixed deposits to compute the tax liability and then deduct the TDS already paid for the same.

Therefore it is very easy to see why ELSS is one of the most popular investment options. It saves tax, it gives comparatively better returns than it’s peers in tax saving options with a lock-in period of a mere 3 years. Though remember that ELSS is a riskier than other fixed income investment options.

Start planning your taxes in advance.

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June 2021