Tax Savings Investments

One of the most integral aspects of managing finances is planning taxes and ensuring you pay the government only what’s necessary. There are plenty of deductions that pop up when you submit your Income Tax Returns and you can use them to reduce your tax liability. 

Section 80C deduction is one such way of tax planning. It provides deduction of up to Rs. 1.5 Lakh from your income by investing in certain tax-saving vehicles. They can help you save on a lot of money but the catch is that most of the available options have either low returns or longer lock-in periods. 

Smart investors however, know that these tax-saving instruments can provide that added benefit of helping them earn an income alongwith with the added benefit of savings on tax. There are plenty of ways with which you can enjoy the most benefits from these savings. 

One of the best ways to do it is by investing in them early on in the financial year and also formulating a plan that can help access these plans which offer maximum benefit. 

Here are some of the factors to consider when you’re planning to apply for these Tax Saving Instruments –

  • Target Returns
  • Liquidity, and 
  • Taxation 

With that in mind, let’s take a look at some of the different tax saving investment plans that you can opt for –

InstrumentPast Returns / Indicative YieldsPeriod of Lock-in Taxation
ELSS 12-14% 3 years Long-term Capital Gain Tax @ 10%
Public PF 7.10% 15 years from the creation of the
National Savings Certificate6.80% 5 to 10 years Interest Taxed @ Income Tax Slab
Bank Deposits 4.90 – 5.50%5 years Interest Taxed @ Income Tax Slab
New Pension Scheme8-10% Till retirement Long-term capital gain tax @ 10%

ELSS – Why choose it & How is it beneficial?


Of the many options available, one of the popular remains ELSS. 

This product is specifically for individuals who are looking for capital appreciation in addition to saving tax. It also provides the added benefit of a short lock-in period. 

The 3-year lock-in period is among the lowest compared to PPF which has a 15 year lock-in from creation of account. PPF is primarily looked at for retirement purposes given the long term horizon ELSS has the potential to provide similar benefit with a higher return. 

How does the taxability on ELSS work?


By investing an amount of Rs. 1.5 Lakhs a year, individuals can save taxes that can go up to Rs. 46,800. After completion of three years lock-in period, the gains from these funds are treated as long-term and taxed at 10% to the extent the gains are above Rs. 1 Lakh. 

Who is best suited to these funds?


ELSS mutual funds are categorized as a smart way to save a big amount of money that generally goes towards taxes. ELSS funds do not guarantee returns as they depend on equity markets. If you’re seeking to save taxes and willing to maintain a longer investment horizon with understanding of market risk, then this is the perfect scheme. 

The potential gain of this risk is that you can also earn a higher return amount, compared to the investments in PPF or similar best fixed income investments options. It is advisable to not invest in them if the investor is averse to any form of volatility or nearing retirement. PPF, NPS and other fixed return oriented government schemes are a better option in those cases. 

What are the things to consider as an investor in ELSS?


Before you opt for ELSS, there are a few factors you can consider –

  • Fund returns – Before selecting a fund, compare its performance with other schemes in the category. Next look at scheme returns over multiple periods to see if it shows consistency in its performance. 
  • Fund house history – It is important that as an investor, you choose a fund house that has performed well and consistently over a long period – i.e. anywhere between five to ten years. This is essentially a measure of the fund houses’ processes and overall investing capability. 
  • Financial parameters – There are other parameters which can be considered including Sharpe Ratio and Standard Deviation (SD) / Beta to better understand a fund’s performance and risk. Any fund that has a higher SD and beta highlights a higher degree of risk, which can be justified if returns are also suitably higher – measured by Sharpe ratio. 
  • Fund Manager – When choosing a fund manager, you must be careful in seeking information on their role, experience and style to provide the optimum experience. 

What are the ways to invest in an ELSS?


ELSS investments can be done through SIP or lumpsum mode. SIP mode facilitates spreading the investment on a monthly basis and takes advantage of rupee cost averaging rather than investing the entire sum at once. Further, it is easier to plan for Rs 12,500 per month rather than Rs 1.5 lakh as lumpsum. 

ELSS – Performance Track

Scheme 3 years 5 years10 years15 years
ELSS Schemes 11.7% 8.4% 11.7% 15.4%
Balanced Advantage8.8% 7.0% 10.5% 11.8%
Aggressive Hybrid Fund8.5%7.8%10.7% 13.3%
Large Cap Funds12.0% 8.1% 10.6%15.0%
Multi Cap Funds11.2% 8.6%12.2%15.9%
Midcap Funds 8.8% 9.1% 14.2%16.9%
Small Cap Funds6.8% 8.5% 13.0%NA

With these pointers in mind, it becomes easier to understand how tax saving investments, and especially ELSS works. It gives you the chance to enjoy more savings with a shorter lock-in period. For new investors, it is also a good way to get a taste of the market and start saving money in a disciplined way. 

Disclaimer: There are other deductions available under section 80C, however for the purpose of this article we are restricting only to investing related options which are more commonly considered here.

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