If you have been taxed for the first time and wondered what you should have done to avoid it, welcome to the club. A lot of young investors who are new to the concept of tax-paying find it challenging to manage their money and end up taking a hurried investment decision. But what a lot these individuals do not understand is that tax planning should be a part of their financial planning. Financial planning might help you in keeping all your investments aligned with your ultimate financial goal.
Section 80C of the Indian Income Tax Act allows investments of up to Rs. 1.5 lakhs in specific investment tools that investors can claim for tax deductions.
Here are some of these schemes:
- National Pension Scheme
- Public Provident Fund
- Equity Linked Saving Scheme
Let us understand these investment options in more detail
National Pension Scheme
National Pension Scheme or NPS is a government-backed scheme rolled out under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government of India. NPS is a tax saving scheme which can be purchased by employees of private, public as well as unorganized sectors. NPS needs taxpayers to invest during their employment phase. Once you, as a National Pension Scheme holder, you can withdraw some amount from your scheme. On the contrary, the remaining invested amount is paid out to NPS scheme holders in the form of a regular pension on a monthly basis. NPS investments of up to Rs. 1.5 lakhs are eligible for tax deductions.
Public Provident Fund
Although most earners have an employee provident fund (EPF) account opened on their behalf, taxpayers have the option of investing in Public Provident Fund (PPF) to save some taxes. PPF is a scheme launched under the purview of the Government of India. But remember that PPF comes with a minimum lock of 15 years and hence only if you have the tendency to remain committed for that long you should consider investing in PPF. The rate of interest set on PPF is subject to change is currently set at 7.9 percent.
Equity Linked Saving Scheme
While the above-mentioned tax saving schemes offer low but fixed returns and are usually considered as an investment option by risk-averse taxpayers, if you do not mind exposing your finances to the dangers of equities with the hope of earning higher rewards, you can consider investing in the equity-linked saving scheme (ELSS). ELSS is the only mutual fund scheme that comes with a tax benefit. ELSS has the shortest lock-in among all tax saving schemes, which is for three years.
Here’s an example to help you understand how ELSS works:
Supposed you earn Rs. 20 lakhs per annum that leave you under the 30 percent tax slab. Now if you invest up to Rs. 1.5 lakhs per fiscal year in an ELSS scheme, you can claim tax deductions for the same and bring your gross taxable income to Rs. 18.5 lakhs.
Another good thing about ELSS is that you start investing in ELSS via SIP. Systematic Investment Plan is a systematic approach where you may remain invested until your investment objective is achieved. All you need to do is instruct your bank and every month on a predetermined date a fixed amount shall be debited from your account and transferred to your ELSS fund. This disciplinary investing approach might benefit in the long run as ELSS investments via SIP also stand a chance of benefiting from compounding.
But remember that ELSS is an equity-linked scheme and investments made in equities are prone to market risk. So it is better that you understand your risk tolerance before investing in ELSS. If you are a risk-averse taxpayer, you should reconsider ELSS as an investment option and look for traditional tax saving schemes instead.