RIGHT WAY TO SAVE TAX

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Do you often wonder if you are adopting the right methods to save tax? Fret not; you are not alone. Every year numerous investors are on the lookout for investment havens under Section 80C to decrease their tax outgo. However, as an investor, you should look for tax saving investments that not only help to save tax but also accumulate wealth. You should consider various factors such as lock-in period, liquidity, returns, and safety before choosing the right tax-saving investment.

It comes as a shock to investors that they might not need to invest in tax-saving investments. Let’s understand why:

Tax saving investments decrease your taxable income:

Tax saving investments help only if you have a significant taxable income. Usually, tax-saving investments begin to matter once an investor’s CTC is equal to greater than five lakhs p.a.

Your entire salary is not taxable

Several CTC components of an income are not taxable. They are:

  1. House Rent Allowance (HRA): Some rules apply but generally 90% of the rent you pay
  2. A standard deduction of Rs 50,000 from income is available to all salaried employees
  3. PF employer contribution is exempted from taxable income

Where should you invest to save tax?

Suppose your income is still taxable after taking all these factors into account. In that case, you should consider investing in various tax-saving investments.

An investor can choose from various 80C investment options such as Public Provident Fund (PPF), ELSS (Equity-Linked Savings Scheme), Bank Fixed Deposits (FD), National Savings Certificate (NSC), etc. Among all the tax-saving investments, ELSS mutual funds enjoy the lowest lock-in period of 3 years, as opposed to 5 years and 15 years lock-in period by FD and PPF respectively. These mutual funds are known as ELSS tax saving mutual funds as they qualify for a tax deduction of up to Rs1.5 lac u/s 80C of the IT Act, 1961. If you invest in ELSS funds, you can save up to Rs 46,800 each year. ELSS funds offer dual benefits of tax saving and providing significantly higher returns.

Key features of ELSS funds:

  1. At least 80% of the fund’s total assets are invested in equity and equity-related securities
  2. There is no maximum limit to invest in ELSS. You can invest any amount you desire
  3. ELSS tax-saving funds have a mandatory lock-in period of 3 years
  4. As an investor, you get a tax deduction of up to Rs.1.5 lac u/s 80C
  5. You can choose either the growth or the dividend option at the time of investing
  6. ELSS funds have the potential to earn significant returns. However, at the same time, the returns are not guaranteed