The word tax certainly gives you jitters, isn’t it? Despite this, we deliberately leave tax planning for a later date. Most of us fret overour tax figures only towards the end of the financial year. And in an attempt to save as much tax as possible at the last moment, we often end up making irrelevant investments that cost us much more in the long run.
Tax planning is a critical component of financial planning and needs to be thought over well in advance. Fortunately, the good news is that there are smarter ways to find your way around the tax trap and save maximum on your tax. To get a better grip on your finances, it’s best to start investing in tax savings investments right from the beginning of the financial year to be able to reap benefits towards the end. One must consider the following facts while investing in tax savings investment plans–
- Investment cost
- Risk involved
- Tax implications -during investment, earnings on investment and during withdrawal
- Lock-in period
- Return on investment
As an investor, your primary goal should not revolve only around saving tax but should be aimed at generating tax-free income. If the income you earn through your investment is taxable, then the key objective of making money over the long run gets eliminated because taxes will eat up your returns.
If you wish to kick-start your tax saving journey, here are a few investment plans that will not only help you save tax but also earn tax-free income.
- Equity Linked Saving Scheme (ELSS): One of the most sought-aftertax saving investments, ELSS is specifically designed for saving tax. Being linked to the market, this financial instrument is a high-risk product but it also has the potential to offer higher returns. It boasts of being an equity-based investment option alongside offering the shortest lock-in period of 3 years among its class of investments.
- Public Provident Fund (PPF): This is a long-term saving investment option issued by the Central Government. Any contribution (having an upper limit of Rs 70,000) made towards PPF is exempted from tax and the interest received on maturity is tax-free. PPF usually offers 8% rate of return to the investor but the only glitch it that the investment is locked in for a period of 15 years.
- Employee Provident Fund (EPF): EPF is meant for salaried individuals. Here employees contribute 12% of their basic salary on a monthly basis towards EPF. The employer also contributes an equal share but only a portion of it is transferred into the EPF account of the employees. The employees’ contribution qualifies for tax exemption but not the employer’s share.
- Life insurance policies: Life insurance policies also serve as effective tax saving investments. The premium you pay on life insurance is exempted from tax, thus lowering the overall taxable amount from your monthly income. Payout received from the policy at the end or during the policy period is tax-free. Also, the lump sum amount that the family receives in case of any unfortunate event is tax-free.
There are several other investment plans that can help you save tax and also earn tax-free income. Each has its own set of pros and cons. It’s up to you to choose the right tax saving investment tool that best suits your needs in terms of investment duration and expected returns.