There are different options to save tax that exist in India, the key however is to do tax planning in a way that not only helps you to save tax but effectively work for you in wealth creation as well. The most commonly known tax-saving investments are under Sec 80C and National Pension Scheme (NPS). Some of these investments can play a dual role in saving tax as well as building wealth over the long term. Let us look at some of these tax saving options and how you can use them effectively.
Employee Provident Fund (EPF)
This monthly deduction from your salary towards EPF can help you build a large corpus for your retirement. Your investment in EPF has the potential to earn better returns when compared with any other debt investment, at the same time it is backed by the Government of India. A reasonable contribution in EPF can be treated as the debt allocation in your portfolio. It also helps you to avail tax benefits u/s 80C. There are options available with many companies where you can voluntarily invest in the provident fund along with the mandatory EPF deduction by the employer. Those who have outstanding liabilities like a home loan or need higher cash flow at the end of every month may opt for a minimum contribution towards EPF, else it is a good investment option from the long term growth and benefits perspective.
Public Provident Fund (PPF)
Just like EPF, this investment also falls under the debt asset class and is quite popular among investors. PPF is another long term investment that offers an attractive rate of interest along with the flexibility to invest the amount that you wish to avail tax benefit. The PPF account has lock-in for the first 15 years compared to EPF which can be withdrawn only in case of change of job or at the time of retirement. There are options that permit partial withdrawals from year 7 i.e. on completing 6 years of regular annual investments in PPF if required. This adds some more flexibility in PPF when compared to EPF.
Equity Linked Saving Scheme / Tax Saving Mutual Funds (ELSS)
ELSS falls under the equities asset class and offers the potential to generate higher returns compared to any other options. ELSS are offered by different mutual fund companies where these funds have a 3 years lock-in and as per the guidelines have to invest a minimum of 80% in the stock market. For investors who want to save tax at the same time invest in equity-oriented funds can certainly consider ELSS as this can work in both ways for them. ELSS also offers good liquidity because the lock-in period is just for 3 years, but it is advisable to hold ELSS investment for a longer period from a wealth-creation perspective. Since the investment is in the stock market, this option has one of the highest growth potential over a period.
Sukanya Samridhi Yojana
Sukanya Samridhi Yojana is a Government of India scheme that help parents of a girl child to save regularly for their daughter. The investment under this scheme at present generate 7.6% return per annum and also give the tax benefit u/s 80C. The investment can be done up to the age of 14 and the maturity will be at 21 years. This scheme can also be looked at as an objective oriented investment where the accumulated funds can be useful for daughter's higher education or marriage.
National Pension Scheme (NPS)
NPS offer tax benefit u/s 80CCD allows you to save tax by making an additional investment of Rs.50,000. This is in addition to the limit of Rs.150,000 u/s 80C. NPS encourages people to invest in a pension account at regular intervals during their employment. Investments under NPS can be invested in equities and debt depending on the risk appetite of the investor. NPS investments you do are locked up to the age of 60 and you can withdraw a maximum of 60% of your corpus at that stage. You have to invest the remaining corpus in annuities which give you a monthly pension post your retirement.
Tax planning is important and there are different ways to save tax. These options have their benefits and you need to select them based on your needs and risk profile. ELSS can be instrumental in generating higher returns at the same time it does carry additional risk. This risk however gets reduced substantially if the investment is held for a longer period. Despite that, if you prefer not to take the risk and you are fine with reasonable growth then you may consider options other than ELSS. Another approach you may take is to create a blend of these options where you can take a limited risk and grow the overall investment at a better rate as well.
About the author:
Harshad Chetanwala, the author of the article is a co-founder of MyWealthGrowth. He is a Certified Financial PlannerCM with more than 19 years of experience in financial services and in the past have worked with companies like Quantum Asset Management Company, HDFC Securities & HDFC Standard Life Insurance.
In the past 18 years of his career, he has worked in multiple roles focusing on Personal Finance, Asset Allocation, Goal based investing, Mutual Fund, Equities, Debt and Insurance that help families to achieve their financial goals. He specializes in guiding investors on Financial Planning, Investment in Financial Assets & Gold, Mutual Fund Portfolios and Financial Protection.
In his previous stint at Quantum Asset Management Company, he has delivered talks at different platforms to empower the audience with knowledge on personal finance and investing. He strongly believes in creating financial awareness that lets families take control of their personal finances.