Tax season is upon us. You only have two more months until April rolls around. If you’re not careful, you might end up paying way more in taxes than you have to.
One good thing about the tax season is that you are forced to get your finances in order. You’d be surprised to realise that once you look at how much cash you have leftover, tax planning becomes easy. This is also the season when several brokers, banks and advisers flood your inbox with different investment plans and schemes. From Fixed Deposits to PPFs to purchasing stocks on the share market—every cousin and their uncle has some expert advice to offer.
The real question is how do you figure out the tax-saving instrument that suits you the best!
Start by making a list. And doing your own research. It is your money that you’re going to put to work. Just like no-one else can go to your workplace and do your job for you, nobody else would be able to invest money for you. Wealth management advisers and financial wizards might have all the market data to advise you—however, at the end of the day, it is your money. Your future.
Equity-Linked Savings Scheme (ELSS) mutual funds
An ELSS mutual fund is the one that is eligible for tax deduction. You can invest up to Rs. 1.5 lakh every financial year in an ELSS mutual fund and you can get tax deductions on its gains, according to the Income Tax Act of 1961 and amendments under Section 80C.
Thanks to this section in the Income Tax Act, you can claim 1.5 lakh of your total income as tax exempt.
Some features of ELSS funds that make them stand out from rest of the instruments are:
Low lock-in period
Your money stays locked in for a period of three years. Other investment options that also give you an opportunity to save on tax however have longer lock-in periods such as five years Fixed Deposits or a Public Providend Fund and Sukanya Samriddhi Yojana. It is the smart thing to do to plan for your future. However, it is necessary to not lose sight of your immediate future needs! The returns that you might gain after three years would come in handy in case there’s an emergency at the end of the 3 years. Just be sure that you won’t need the money you put towards an ELSS for the next three years. Unlike other investment instruments, the rate of interest per annum for an ELSS is high at 12-15% because these schemes directly invest in equity. After demonetization, the rate of interest on Fixed Deposits reduced to about 6% per annum. The other options mentioned earlier: PPF gives you a return of 7.6% per annum while SSY gives 8.1%.
You are more likely to get a higher rate of return on the amount you invest in an ELSS compared to what you put in any another instrument.
Diversify your investments
Diversifying is the first step towards investing the right way—don’t rely on any one sector or stock. Just like in life you have a Plan A, Plan B…and sometimes even a Plan Z: so be it when dealing with your investments. ELSS mutual funds spread out their purchases across various equities, sectors and companies. Perhaps, you don’t have the time needed to monitor and track every equity’s performance—a mutual fund automatically does that for you. A diversified portfolio that is sprinkled with an ELSS among other forms of investments can go a long way in helping you remain financially secure.
Beat the inflation rate
An equity fund gives an average rate of return of 12-15%. On average, India’s inflation rate has been about 6%. In the long-run equity-based investments are more likely to beat inflation when pitted against others such as PPF, FDs etc. Though ELSS funds come with the usual set of risks that are associated with investing in the stock markets, they provide you a better chance of beating the inflation rate. If you are investing for the future you—you need to calculate how much would your money be worth a few years down the line. Would you be able to afford the same lifestyle in your future given the fluctuating prices of essential goods and services? ELSS funds just might help you successfully beat the inflation rate.
Investment options and estimated returns:
Let’s take an example and illustrate potential returns from equity-based investments compared to other traditional options. In this example, we’ll consider that you have Rs. 1 lakh to invest every year for the next 15 years! Base on the table, you can see that investing in ELSS is likely to yield you higher returns than rest of them.