There is nothing more satisfying than mastering the art of arranging your finances in a way that it either avoids or postpones the payment of taxes. Tax planning allows taxpayers to optimize the use of tax benefits, deductions and exemptions, which help them minimize their tax liability for a particular financial year. Therefore, implementing effective tax saving strategies should be at the very core of our financial planning, year after year.
In India, eligible taxpayers have several options for saving their taxes under Section 80C of the Income Tax Act. One of the ways is to invest money in various tax saving schemes. To meet our financial goals, we should hunt for tax-saving alternatives that will not just help us save money but will also multiply it over a period. This is when tax-saving funds, also known as equity-linked saving schemes (ELSS), tops the list for offering higher returns over a long term. Let’s understand how ELSS will work as the best tax saver plan for you.
- Potential for high returns: ELSS has shown a compounded annual growth of 11.2% over the last five years. It is considered a better option in comparison to conservative tax savings investments such as PPF, insurance policies, bank deposits, etc. because it delivers relatively high returns over a longer duration. According to the stats released by the Association of Mutual Funds in India, people have invested Rupees 85,804 crores in tax savings funds as on April 30, 2018.
- Saves you from the last-minute rush: Most of us procrastinate making investments until the end of March every year. To save taxes, we make hasty decisions that may not work in tandem with our financial goals. For instance, some individuals end up paying a lump sum of Rs 1.5 lacs for an investment towards the end of the year which may cause a major liquidity crunch. On the other hand, investing in tax savings schemes reduces this burden because we pay through monthly installments.
- Shortest lock-in period: Of all the tax saving investments that are available to us, ELSS funds offer the shortest lock-in period. Usually, such investments have a lock-in period varying from 5 years to 15 years. A common mistake made by most of us is that we redeem our money as soon as the lock-in period ends. In the case of ELSS funds, as the underlying asset class is equities, we should keep our money locked-in at least for 5-7 years to garner good profits.
As investors, we should invest in ELSS funds only if we are interested in equity investments. If you are only looking at saving your taxes, there are various other tax saving schemes to choose from. Irrespective of the choices you make, ensure that you have an effective tax saving strategy to save a great deal of money, year after year.