Every year, as the March starts approaching the thought of tax declaration start giving sleepless nights to most of the salaried and business people. As much as people hate paying taxes, they hate the complex terminology and the sections and subsections which follow. It's true, the tax is a difficult beast to understand. That is one of the reasons many people don't try to understand the provisions for tax deductions and pay the tax and be done with it. That's a wrong way to approach tax. To ease the burden on taxpayers, the government and the income tax act has provided several windows to save the tax. Let's explore all the avenues of tax saving.
Section 80C of the Income Tax Act is the most popular tax-saving route. In this section, there are certain prescribed investment instruments which help to save tax. If you invest money in these specified instruments the government offers you certain tax concessions. You may ask why the government allows these tax sops. In the larger scheme of things, it is in the interest of the government to encourage the culture of saving and investment amongst the citizens. Section 80C, 80CCC and 80CCD are some of the sections which have a lot to offer. However, the maximum consolidated deduction under section 80C is Rs.1,50,000. The condition is that you have to do it a disciplined manner all through the year in the prescribed instruments.
Following are the investment instruments which are specified under section 80C, 80CCC and 80CCD
- Public Provident Fund (PPF)
- Life Insurance Premium (LIC)
- National Savings Certificate (NSC)
- Equity Linked Savings Scheme (ELSS)
- 5 years fixed deposits with banks and post office
- Tuition fees paid for children's education, up to a maximum of 2 children
The government, thought the prescribed investment mediums, is trying to build the culture of saving and investment. However, the thing is that not all the government prescribed mediums are good for investment. Let's take the example of investing in LIC. It will give you tax relief but it wouldn't be a good investment as the returns don't have the ability to create good wealth. Hence, it's incumbent upon investors to find the best and the most tax efficient investment means which not only save tax but also give better returns.
Let's find out investment instruments which save tax and also give good returns.
Public Provident Fund (PPF) - Is the most stable and dependable investment scheme. PPF is operated by the government of India. The problem, however, is that PPF investment comes with some strict conditions like 7 years lock-in period plus limitations on the amount you can invest like currently, you can invest minimum Rs.500 or maximum Rs.1,50,000 in a financial year. On the other hand, the point which makes it one of the popular tax-saving instruments is that it gives compound returns. Under section 80C you can claim up to Rs.1,50,000 deduction by investing in PPF. In order to get the tax benefits, it's always better to have some portion of your income allocated to PPF. The point to remember is that it provides fixed returns and the interest rates get reviewed from time to time. Hence, it should be looked at a tax savings scheme and not a wealth creating scheme.
ELSS - The Best Tax Saver - There are many people how get confused about how is ELSS different from a mutual fund? Let's clear the confusion once and for all. ELSS is a mutual fund which has a lock-in period of 3 years. Equity Linked Saving Schemes (ELSS) is one of the types of Mutual Fund. It functions the same way as a mutual fund. Like in a mutual fund, in ELSS, your mutual fund company will pool your's and the other investors' money and invest it in the equity market (stock market). A bigger chunk of money will attract higher returns while the losses can be spread out. The point where ELSS becomes a little different than mutual fund comes with a lock-in period of 3 years. The condition is that you cannot exit the funds before 3 years. Even with that condition investment in ELSS an extremely attractive scheme. It has less lock-in period than any other tax-saving scheme and gives higher returns.