Kickstart Your Tax-Saving Journey with these Investment Options

New Delhi (India), March 6: The end of the financial year is fast approaching, so it's time to review your tax planning investment portfolio. While most taxpayers are familiar with popular tax-saving options like the Public Provident Fund (PPF), National Pension System (NPS), and tax-saving fixed deposits under Sec 80C, mutual funds offer attractive tax-saving alternatives to make your money work smarter.

 

In this blog, we provide a comprehensive guide on the best investment avenues to claim tax deductions under Sec 80C and beyond so that you can kickstart your tax-saving journey.

 

Overview of Tax-Saving Investment Options

 

ELSS Mutual Funds

An ELSS mutual fund offers high return potential from equity markets along with tax-saving benefits under Section 80C of the Income Tax Act, 1961. However, the lock-in period is relatively less, only 3 years.

 

Public Provident Fund

The PPF offers guaranteed returns of up to 8.7% (as of February 2024) currently coupled with a capital guarantee which makes it a reliable tax-saving choice. The lock-in period is 15 years.

 

National Pension System

The NPS offers market-linked returns coupled with tax deduction benefits under Sec 80CCD(1). It forces long-term retirement savings with a partial withdrawal option after 3 years.

 

Tax Saving Fixed Deposits

Offer guaranteed returns of up to 7.25% currently (as of February 2024). Good for risk-averse investors, but lock-in is 5 years.

 

Sukanya Samriddhi

Focused especially on girl child savings. Offer highest tax-free return fixed at 7.6% currently (as of February 2024) and comes with Sec 80C benefit.

 

Life Insurance Plans

Endowment & ULIPs help save tax under Sec 80C. Lock-in is 5 years for the highest liquidity.

 

Tax Saving Options in Mutual Funds

While mutual funds offer multiple options for long-term wealth creation, some specific funds also allow you to save income tax under Section 80C of the Income Tax Act, 1961.

 

ELSS Funds

An open-ended equity fund with Sec 80C tax benefit but only a 3-year lock-in allows long-term wealth creation.

 

1. Benefit: Potential for higher inflation-adjusted returns vs. PPF, FD, etc.
2. Suitable for: Growth-oriented investors aiming tax-saving and long-term wealth creation.

 

Bandhan ELSS Tax Saver Fund

This scheme allocates 94.72% of its corpus to equities (as on 31st Janaury 2024). Of this, 63.46% is allocated towards large-cap stocks, while 14.84% goes into mid-caps and 16.42% in small caps (as of February 2024). 5.28% of the corpus is allocated to cash (as on 31st January 2024). Focusing on high-growth small and mid-sized companies has enabled this fund to potentially deliver long-term returns. This ELSS mutual fund may be an aggressive tax-saving option for investors with a high-risk tolerance.

 

Index Funds & ETFs

Offer index-based returns at minimal costs. They may have lower volatility than active funds. Gains made from index funds and held for over 12 months are taxed under LTCG tax at 10%. However, LTCG upto INR 1 lakh are exempt from any taxation.

 

1. Benefit: Low-cost, tax-efficient way to earn market-linked returns
2. Suitable for: Passive investors wanting index-based performance.

 

Retirement Schemes

Schemes such as NPS for retirement planning with tax benefits under Sec 80CCD(1).

 

Ensure you evaluate your risk appetite, return requirement, and investment horizon before deciding on a tax-saving fund that aligns best with your long-term needs and goals.

 

Principles for Your Tax-Saving Investment Allocation

Follow these principles for allocating across available tax-saving investment avenues:

Matching Risk Appetite

Select a fund based on whether you are conservative, moderate, or aggressive in nature.

 

Maintaining Liquidity

Ensure the liquidity of the investment scheme is in line with your liquidity needs. For instance, PPF has a longer lock-in period of 15 years. In comparison, ELSS investments have a lock-in period of 3 years. This may be more suitable for investors seeking a liquid investment.

 

Aligning Investment Tenures

Invest in instruments based on your short, medium, and long-term goals.

 

Conclusion

Ideally, build a balanced tax saving portfolio across 2-3 instruments considering your needs and risk appetite. ELSS funds offer wealth creation opportunities in addition to tax savings as they invest predominantly in equities. Choosing the direct plan instead of the regular plan, staying put for the long term, and investing through SIPs may be potentially beneficial. Carefully assess your risk tolerance, return requirement and investment tenure before picking an ELSS fund to align it with your financial goals.

 

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