Tips to Use Tax Saving Investment and Maximize Returns

While considering which is the best tax saving instrument for you, the key factors that you would want to analyze are costs, liquidity, safety, flexibility, returns, transparency, how easy it is to invest and how your income would be taxed. Every one of these specifications is given equal importance and the composite scores for the various tax-saving options are calculated as well.

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7.7 Crore

Registered Consumer

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

When you’re an investor, due to your busy schedule and the lack of time, the ease of investing matters a lot. So fixed deposits score very high in this as it’s just a few clicks and you’re good to go. But everything which is easy does not come at a low price. The same applies for insurance agents as well. They do all the paperwork and all you have to do is just sign on the sheet.

Post tax gains from fixed deposits are less than 5% in the 30% tax margin. With traditional life insurance plans comes meager returns, but on top of that they also force the buyer to continue until its matured. So investors ready to make little efforts have an interesting opportunity here. (are we talking in insurance buyer perspective or insurance investor perspective).

With the launch of the new e-KYC facility, the whole process of investing in ELSS funds has become very simple and it takes less than 30-35 minutes. NPS investing has become completely paperless due to the efforts of The Pension Fund Regulatory and Development Authority. And also, Ulips can be bought online without much effort. A simple investment advice is to not go by the ranking criteria only as some investment plans may not be suitable for certain individuals.

For example, senior citizens above 70 have much better gains investing in the Senior Citizens’ Savings Scheme, The Public Provident Fund or the tax saving fixed deposits. And all of these investment plans are considerably low in the ranking. So the ELSS funds is not a viable option for senior citizens even though they offer great returns. And some of the investment options are not available to all investors.

Perfect examples would be the Sukanya Samriddhi Yojana which is available only to girls below the age of 10, the Senior Citizens’ Saving Scheme is for those above 60 (58 in some cases) and The National Pension System (NPS) is only for those below 60. All of these are good tax savings options in general. But the only dilemma is choosing the tax saving investment option which best suits your needs and goals.

ELSS Funds

ELSS funds are at the top of the list for the best tax saving instruments due to their potential and as their returns are on a significantly higher level.

18.69% of annualized returns in the past 3 years and 17.46% in the past 5 years have been generated by this tax saving instrument. Since each fund has a different portfolio, the returns from each of these individual funds in this tax saving instrument vary.

This category of funds in this tax saving instrument also perform really well on taxability, transparency, costs and liquidity. The investor will be charged only a mere 2.5-2.75% a year (for direct plans, the charges would be lesser than this) and another advantage is that there is no entry load either. SEBI regulates Mutual funds really well and everything including charges, portfolios and transactions are a part the public domain. As these regulations are not applicable to capital gains that are long-term and come from equity funds, the returns are not subject to taxes. In terms of liquidity, the lock-in period for these funds are the shortest i.e just three years, but this period should not be taken as the holding period for the fund.

A common mistake made by investors is to exit after 3 years. This is the reason that leads to the low net inflow from investors in the ELSS category. ELSS funds are best way to start investing in equities as said by experts. The lock in period portrays a discipline which eventually becomes a habit for the investor.

Lump Sum Investing at the End of the Year

So far, SIPs have proved to be one of the best ways to invest in equity funds and stocks.The easy and simply logic is lost on investors of this tax saving instrument though SIPs have seen a robust increase. According to AMFI data, close to 50% of the total inflow into ELSS category take place in the last 3 months of the financial year. 22-25% of the total inflows is accounted for in the month of March itself. A common mistake is that taxpayers are start rushing towards the year end rush and invest a huge sum in assets that are risky rather than taking the safer and more reliable SIP route.

Do not Make your Choice Based on Short Term Performance

A big mistake that investors do is picking the best performer simply by looking at the short term performance of the fund. As funds of this tax saving instrument are equity schemes, the quantum gain isn’t as important when compared to how stable the returns are. So, before you go ahead and simply make a choice, look at the long term performance of the fund, like 3 years or 5 years.

Look Out For the Dividend Option

The dividends that you receive from mutual funds are simply a method of obtaining profits. The dividends that you think you are receiving are being deducted from the net asset value. So, you’re not really gaining anything if you think about it. The dividend option is not viable if you have invested in funds of this tax saving instrument for the long term. Also, do not get fooled by the dividend reinvestment option. The 3-year lock up period is started all over again when the funds give out your dividend and it reinvests that money back into your account. As a result, you are locked for perpetuity.

Do not Ignore Funds which are Small in Size

The best performing fund in this tax saving instrument since the past 10 years is the Invesco India Tax Plan which has an annual return of 13.84%. But as its AUM is only Rs 320 crore, not many investors have benefitted from it. Hence, it is important to consider the performance of a fund instead of simply looking at its size before you make a choice.

Do not Redeem your Funds after the Lock-in Period

The funds of this tax saving instrument are not to be treated as short-term investments. Maturity and lock-up periods, often confused to be the same, are actually different terms. Maturity time indicates that after that term is over, whatever money you’ve invested and the benefits you’ve gained, you’ll get them back. Although ELSS funds have a lock-up period of three years, you shouldn’t redeem them immediately after that. They are regular equity funds and you have to keep them for a longer duration.

ULIP

Unit linked insurance plan is an excellent tax saving instrument with a mixture of investment and insurance. In this tax saving instrument, the company puts a portion of your money into insurance for life cover and a portion of it into debt or equity mutual funds or both according to what matches your long term goal.

A unit linked insurance plan allows the investor to switch their portfolio between equity and debt funds on the basis of their risk appetite and also your awareness on how good or bad the market is performing. However, most of the times, the buyers of this tax saving instrument do not have the knowledge of debt or equity funds, nor the time to learn it and hence do not know when to make the right switch. So, if you are someone who understands perfectly well how the interest rates fluctuate and know how equity returns work, this tax saving instrument is probably the best option for you. Also, ULIP is a tax saving instrument that works well in a long term horizon, i.e., ten years.

Premium paid towards this tax saving instrument is eligible for tax deductions under Section 80C of the Income Tax Act. The returns that you get out of the policy on maturity are not subjected to taxes according to Section 10D of the Income Tax Act.

VPF and PPF

Voluntary Provident Fund is a tax saving instrument where the contributor to the fund has control of the periodical fixed contribution. This tax saving instrument is only available to individuals who receive a monthly income through a specific salary account. The employee’s provident fund (EPF) needs contribution from both the employers and the employees. VPF is an extension to EPF. According to Section 80C of the Income Tax Act, contributions towards this tax saving instrument by an individual is eligible for deductions up to a maximum of Rs 1,00,000.

An individual can invest anywhere from Rs 500 to Rs 1,00,000 in a year in a public provident fund (PPF). This tax saving instrument falls under the EEE (Exempt-Exempt-Exempt) category. This means that all investments that are made in the public provident fund are tax deductible under Section 80C of the Income Tax Act. Also, the accumulated interest and amount from this tax saving instrument will also not be subject to taxes at the time of withdrawal.

Savings Certificates

Savings certificates make great tax saving instruments. The National Savings Certificate is an investment scheme of fixed income that you can easily open in any post office fixed deposit. They have two fixed maturity periods – 5 years and 10 years. According to Section 80C of the Income Tax Act, investments of up to Rs 1,50,000 in this tax saving instrument can get you a tax rebate according to Section 80C of the Income Tax Act. Also, the interest that is earned on the certificates will be added back to the initial amount and you can get a tax deduction on this as well.

Senior Citizen’s Savings Scheme

This tax saving instrument is a really good way for senior citizens to make money. Senior Citizen’s Savings Scheme is an effective and a long term savings option that offers security. An individual who is above 60 years is eligible to invest in this tax saving instrument. The maximum amount that can be invested in this tax saving instrument is Rs 15,00,000, either in a joint account or a single account. The tax saving instrument gives a return of 8.6%. According to Section 80C of the Income Tax Act, tax deductions up to Rs 1,50,000 can be claimed in this tax saving instrument.

National Pension Scheme (NPS)

The national pension scheme is a tax saving instrument which is an initiative of the Central Government. It is allowed for employees from private, public and unorganized sectors. This tax saving instrument encourages people to invest in a pension account regularly during their employment period. Post retirement, the policyholders can take out a percentage of the corpus. The remaining amount can be used as a regular pension. This tax saving instrument would make an excellent choice for people who want to plan retirement early.

A portion of the funds in this tax saving instrument will be invested in equities. There is no maximum limit for the amount you can invest. However, the tax saving instrument has a minimum amount based on the tier which you belong to. If the minimum amount is not retained, the account will be frozen. To unfreeze it, you will have to pay a penalty.

You can claim a tax deduction under this tax saving instrument for up to Rs 1,50,000 – for employer contribution and also for self-contribution.

Donations

Donations also make up great tax saving instruments. You can claim tax deductions up to 50% or 100% of the donations made to charities according to Section 80G. However, cash donations that exceed RS 10,000 will not qualify for this tax saving instrument. Also, the total deductions for this tax saving instrument cannot exceed 10% of your gross total income.

Education

The tuition fee that you pay for your children’s education is also a great tax saving instrument. According to Section 80C of the Income Tax Act, tuition fee for up to two children is eligible for tax deductions up to an amount of Rs 1,00,000. Keep in mind that this deduction on this tax saving instrument is only applicable on tuition fee for full time courses in India. Transport costs, hostel fees etc., do not qualify.

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-12-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).