An overview of tax-efficient investing

Key takeaways

• Investing must yield higher returns while being tax-efficient.
• Many strategies like ELSS, PPF, NPS, government bonds, and municipal bonds have proved to be quite tax-savvy in nature.
• Health insurance premiums, and capital gains exemptions can also be utilised to create tax-efficient portfolios.

Investing is not only limited to higher returns these days. It is important that your investment vehicles use such strategies that minimise tax liability as well. So, you must strategise your portfolio like balancing profitability and tax efficiency.

Here are some ways that you can use to build a tax-efficient portfolio.

Equity Linked Savings Schemes

Equity Linked Savings Schemes (ELSS) are diversified equity mutual funds that offer the tax benefits under section 80C of the Income Tax Act, 1961. Under this scheme, you can get a tax deduction from your gross total income of up to ₹1,50,000. One of the most important benefits of ELSS is that it has a short lock-in period of three years. It not only encourages the potential for capital appreciation but also is a more flexible investment vehicle than other options.

Public Provident Fund

Public Provident Fund (PPF) is a long-term tax-saving investment channel backed by the government of India. Contributions under this scheme are eligible under 80C. Most importantly, it’s an EEE investment option i.e., exempt-exempt-exempt. This means you are saving money at three stages- while contributing, earning interest, and withdrawing at the time of maturity. On top of that, PPF investments have a 15 year lock-in period thus, promoting a long-term savings method.

National Pension Scheme

National Pension Scheme (NPS) is a retirement savings scheme. And its contributions are eligible as deductions under section 80CCD of the Income Tax Law. Such investments have a lock-in period until retirement. The best part is that if at the time of maturity, the entire corpus (if withdrawn as an annuity) is tax-free.

Tax-free bonds

Such bonds are issued by the Government of India. Interest earned on these bonds are exempt from tax. They include government bonds and municipal bonds. Typically, they are suitable for investors in the higher tax brackets.

Health insurance premium

Under 80D of the Income Tax Act, any premium paid for yourself, spouse, dependent children or dependent parents is eligible for tax deduction. The threshold limit is ₹25,000 in this case (₹50,000 if anyone is a senior citizen). So, you can prioritise health protection while saving taxes.

Capital gains tax exemption

Long-term capital gains (LTCG) from the sale of equity shares and from the sale of mutual funds is exempt from taxation (in case the holding period is more than 1 year). Such strategies encourage capital investment.

Tax harvesting has some options to reduce your taxable income. One option is loss harvesting. In case any of your investments are underperforming, you sell them and set these losses against your LTCG to reduce your overall tax burden. Another choice is while investing in mutual funds, go for the growth option. This is because dividends earned every year are subject to LTCG tax. However, in growth mutual funds, it only applies at the time of maturity.

Additionally, this is helpful to higher bracket taxpayers who can leverage by paying 10% tax on LTCG instead of paying 30% tax through income slabs.

Conclusion

These tax-efficient investment options not only help to decrease tax liabilities, but also provide opportunities for long-term growth and wealth generation. When choosing tax-efficient investment options for your portfolio, you should keep your financial goals, risk tolerance, and investment landscape in mind.