Investment Options That Help You Save Taxes

There are three types of tax-saving investments based on which transactions are tax-exempted. Every investment has the following three types of transactions:

a) Initial investment

b) Accrued or paid-out interest

c) Maturity value

EEE stands for triple exemptions, where all the three transactions above are ‘exempt’ from tax. EET investment will have the first two transactions exempt, while the maturity value will be taxable. Similarly, ETT investments have only the first transaction as exempt. Thus, EEE investments are the most tax-efficient in the market. 

Tax Saving Investment Options

Fortunately, we have several of them available for investment.

• Unit Linked Insurance Plans (ULIPs)

Unit linked insurance plans or ULIPs are the best tax saving investment option in the market, due to the following reasons (apart from EEE status):

a) Multiple fund options ranging from high-risk equity growth funds to safe liquid funds

b) Create your very own managed portfolio with multiple asset allocation strategies

c) Switch between funds; i.e. high-risk to safe funds and vice versa any number of times without a tax liability

d) Goal security with premium protection option. ULIPs, which offers to protect your premium investments in case of your early demise.

e) Wealth boosters add to portfolio growth for long-term investors

ULIPs enable unprecedented safety for your financial goal. Once you have set the ULIP on the course towards your goal it can ensure that your family will meet those goals even if you are not there to see to it.

Also, ULIPs can offer one of the longest investment tenures and least bothersome portfolio management. You can set your investment strategies as per your risk appetite in the beginning and automate the investments. The ULIP will manage your portfolio according to the strategy and safeguard your returns as you approach maturity.

• New Pension Scheme – NPS

The National Pension Scheme is one of the best retirement savings plans available in India. NPS Tier-I account offers great investment options along with tax benefits for employees and self-employed professionals.

The best part of NPS is, perhaps, the additional tax-saving opportunity of up to Rs. 50,000 under section 80CCD (1B). Thus, an NPS account can help you reduce your taxable income by up to Rs. 2 lakh in a financial year. The only drawback of NPS is the long lock-in period for withdrawal. The account is specifically made for retirement and only opens for full withdrawal once you attain the 60 years of age.

Withdrawal is tax-exempt provided you convert 40% of the corpus into a pension. You can withdraw only 60% of the maturity value in a lump sum without increasing your tax liability.

• Guaranteed Savings Plans

Guaranteed savings plans are another tax-efficient investment plan from the life insurance companies. These plans are similar to ULIPs for tax-exemption. That is maturity value is tax-exempt so far as your annual premium is less than 10% of the policy sum assured. The premiums up to Rs. 1.5 lakhs reduce your tax liability under Section 80C.

However, unlike ULIPs, guaranteed savings plans do not offer multiple fund options to investors. Instead, these plans offer safe and a fixed minimum return on the invested amount, apart from the life cover. Guaranteed saving plans are the best option for those financial goals, where you need to build a specific corpus without fail.

• Public Provident Fund – PPF

Public Provident Fund is another popular long term saving option. The initial purpose of this investment was to help the self-employed and unorganised sector employees. However, it’s debt-market linked rate of return and EEE tax status have made it a popular investment option for long-term financial goals as well. You need to invest money in PPF for at least 15 years, although the plan does allow partial withdrawal after 5 years. The only drawback of the PPF investment is perhaps the maximum amount you can invest in one financial year.

Maximum investment per financial year in an individual PPF account is limited to Rs. 1.5 lakhs. Also, the maximum limit is not counted based on the account but the earning individual. So, even though you can open PPF accounts in the name of your spouse and children you cannot deposit more than Rs. 1.5 lakh in total.

That is unless your spouse is also earning, filing a separate income tax return and operating her PPF account.

• Equity Linked Savings Scheme – ELSS

ELSS has been a popular tax saving scheme for aggressive investors. ELSS schemes are a tax-saving fund from the Indian mutual fund houses and are passively managed equity funds.

Passively managed means they maintain their portfolio as per a benchmark index, and do not actively trade in stocks. ELSS schemes have a strict lock-in period of 36 months. The lock-in period applies to every deposit you make in the same account separately.

ELSS funds are pure equity investments and if you want to move your earnings to a safer investment you need to wait for 36 months. After the lock-in period on the units is over you can sell the eligible units and invest the funds into a safer investment.

Conclusion

With proper tax planning, you can save up on a lot of your hard-earned income. To begin planning your investments carefully, it is advisable to begin reading about all the various schemes and options available for you. An in-depth understanding of various schemes and how they can benefit you is guaranteed to bear fruitful results. Another important thing to keep in mind before investing is to start early and be patient. Investment decisions taken in a hurry and not well-thought-out can cause unnecessary loss.

Also read: Should I Purchase Term Insurance Even If I Don't Have Any Dependents?

Make the Most of Your Term Insurance Plan with Its Tax Benefits

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.