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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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As the tax season approaches, individuals and businesses in India seek ways to minimise their tax burden. One can save taxes and generate significant returns by making smart investment decisions. This guide will discuss the best tax-saving investments in India to help you maximise your tax savings while growing your wealth. These investment options have been carefully selected based on their tax benefits, risk levels, and historical performance.
Introduction to Tax Saver Investments
Tax saver investments refer to specific financial instruments that offer tax benefits to individuals in India. These investments are designed to help taxpayers reduce their tax liabilities while simultaneously growing their wealth.
Such investments play a crucial role in financial planning, allowing individuals to save on taxes while generating attractive returns. There are several tax-saving investment options available in India, including Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), tax-saving fixed deposits, and equity-linked saving schemes (ELSS), among others. Each of these options offers different benefits and suits varying risk profiles.
Types of Tax Saver Investments
1. Equity-Linked Saving Schemes (ELSS): Features and Benefits
Equity-Linked Saving Schemes (ELSS) are mutual funds that offer investors the dual benefits of tax savings and potential market-linked returns. One of the key advantages of investing in ELSS is the potential for higher returns compared to traditional tax-saving options. These schemes predominantly invest in equities, providing investors an opportunity to participate in the growth potential of the stock market.
ELSS also comes with a shorter lock-in period of three years, which is the lowest among tax-saving investments. This lock-in period ensures that investors stay invested for a certain duration, potentially allowing their investments to grow over time. Additionally, ELSS offers liquidity, as investors can redeem their investments after the completion of the lock-in period.
2. Public Provident Fund (PPF): Features and Benefits
Public Provident Fund (PPF) is a government-backed savings scheme offering attractive tax benefits and a secure investment avenue. PPF provides a fixed interest rate currently set at 7.1% per annum. The interest earned and the maturity amount are tax-exempt, making it a tax-efficient investment option. PPF has a long-term investment horizon with a maturity period of 15 years.
This extended tenure allows individuals to build a substantial corpus over time while enjoying the power of compounding. Another notable feature of PPF is the annual contribution limit, currently set at Rs 1.5 lakh. Individuals can contribute up to this limit and avail of tax benefits under Section 80C of the Income Tax Act.
3. National Pension System (NPS): Features and Benefits
The National Pension System (NPS) is a retirement-focused investment option that offers tax benefits to individuals. NPS allows investors to create a retirement corpus by investing in equity, corporate bonds, and government securities. One of the key advantages of NPS is the tax benefit it provides.
Contributions made towards NPS are eligible for a deduction under Section 80CCD(1) of the Income Tax Act, subject to certain limits. Additionally, NPS offers flexibility in terms of investment choices and fund managers. It also allows partial withdrawals after a certain period, providing individuals with some liquidity in case of emergencies. NPS is a long-term investment option, making it suitable for individuals planning their retirement years.
Benefits of Tax Saver Investments
Tax Saver Investments offer several benefits that make them an attractive option for individuals looking to save on taxes while growing their wealth. Here are the key advantages of these investments:
How to Choose the Right Tax Saver Investment?
Everyone has a different risk tolerance, and it is essential to assess your comfort level before making any investment decisions. Consider your financial situation, investment goals, and timeline. If you have a high-risk appetite and a long-term investment horizon, you may opt for equity-linked savings schemes (ELSS). On the other hand, if you prefer lower risk, fixed deposit schemes or Public Provident Fund (PPF) could be suitable options.
Aligning tax-saving investments with your financial goals is another important factor to consider. Identify your short-term and long-term objectives and select investments that align with them. For example, suppose you aim to buy a house in the next five years. In that case, you may choose a tax-saving investment that offers liquidity and stability, such as a National Savings Certificate (NSC) or a tax-saving fixed deposit.
One crucial aspect often overlooked is the lock-in period associated with tax-saver investments. Many tax-saving instruments have a lock-in period, during which you cannot withdraw funds.
So, understand the lock-in period before making any investment commitments. If you have liquidity needs in the short term, select investments with shorter lock-in periods, like ELSS, which typically have a lock-in period of three years. On the other hand, if you have a longer investment horizon, investments like the PPF or the National Pension Scheme (NPS), which offer tax benefits and retirement planning, could be suitable choices.
Frequently Asked Questions (FAQs)
Q: How can I save 100% income tax?
A: It's unrealistic and illegal to save 100% income tax. However, you can minimise tax through deductions and exemptions within the law.
Q: Which tax savings fund is best?
A: The 'best' varies per individual financial goals and risk tolerance. It's advisable to research or consult a financial advisor.
Q: Which investment is 100% tax-free?
A: Some investments like PPF and tax-free bonds offer tax-free returns. However, they're subject to certain conditions and limits.
Q: How to pay zero tax on a salary of 18 lakhs?
A: Paying zero tax on such income isn't feasible legally. But, strategic planning, like utilising section 80C deductions, HRA, etc., can help reduce tax.
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