One thing we all can agree on is that we don’t really like paying too much in taxes. In fact, saving taxes is one of the main reasons for people to start thinking about investing. When we get the notice from our respective employers to submit our tax saving investment proofs, many of us start to wonder 'What exactly are we supposed to do here?'
Apart from what gets deducted towards our Employee Provident Fund contributions, the traditional answer for many has been to buy an insurance policy or start a Tax Saving Fixed Deposit.
There is however, one more investment option that you may learn about pretty late, which can help you kick start not just smart tax saving, but also lay the first building blocks towards growing your wealth.
Something to note first
There are myriad regulations of the Indian Income Tax Act under which you can potentially save taxes. The most popular, as well as somewhat understood, is Section 80C. Under this, you can invest up to Rs. 1.5 Lakhs in total, in various kinds of tax saving instruments. This money is deducted from your reported income while calculating your total taxable income for the financial year.
Whether it is your EPF contribution or any Life Insurance Premium you pay, it all comes under this section. It’s also the section which allows you to invest in a kind of mutual fund that we are going to discuss next.
ELSS to the rescue
Maybe you have heard about something called ELSS before. It stands for Equity Linked Savings Scheme. It’s nothing but a special kind of equity mutual fund that helps you save taxes. You can invest your money in this fund whether in instalments using the Systematic Investment Plan (SIP) approach or in a lump sum.
Every investment under Section 80C is subject to a minimum lock-in period. This means you can’t take your money out for a certain number of years. In the case of ELSS, the lock-in period is the lowest among all tax saving instruments, at three years.
ELSS also has the potential to grow your initial investment corpus the most, because such a fund will invest in the equity market. Equity investments have traditionally given returns which are among the best. Other options under Sec. 80C, such as 5-year fixed deposits return substantially less.
Not only can you save tax here, but you can also grow your money at the same time. This makes it a smart way to ease yourself into equity investing if you had earlier been held back by the potential ups and downs of equity. Since you are anyway going to be locked in to the investment, you will be forced to give the right time for equity to do its work.
How much tax can you save?
Irrespective of what investment option you choose under Sec. 80C the maximum potential tax saving comes to Rs. 46,800*. However, an ELSS investment is far more likely to not just grow, but also beat inflation.
Why not take advantage of this smart way, not just to save taxes, but also grow your wealth? What’s more, you can invest a little bit each month and not feel the pinch of a big lump sum investment, when the HR notice comes. For smart people such as yourself, the smart answer is ELSS.
*Actual tax benefit will vary from person to person. Tax benefit shown here is calculated at the highest tax slab rate of 31.2% including education cess on the maximum allowable deduction of Rs. 1,50,000 under Section 80C of the Income Tax Act,1961.
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