We are drawing closer to the end of the financial year, and it’s time to save tax by investing wisely. Yes, we’re officially in the tax-saving season.
But before you go ahead and invest in a host of tax-saving investment avenues available under Section 80C of the Income Tax Act, 1961, first it would be wise to assess whether you are a risk-taker (aggressive), or risk-averse (conservative). By doing this, you’ll be able to compliment tax-saving with investment planning and choose investment instruments in line with your risk appetite.
If you are a risk taker, your focus should be on picking worthy instruments offering market-linked returns. Do note that market-linked earn a variable rate of return; so you ought to have the stomach to assume risk.
Risk takers are classified as:
- Those who are young;
- Earn a high income (during the accumulation phase of the life cycle);
- Own or are in the process of owning considerable assets;
- Have limited liabilities and do not have many dependents to support;
- Have financial goals with a time-horizon far ahead; and/or
- Are in general willing to take the risk
If you are a risk taker (or an aggressive investor), here are market-linked tax-saving investment instruments that offer a deduction upto a maximum of Rs 1.50 lakh per annum under Section 80C.
1. Equity Linked Savings Scheme (ELSS)
Equity Linked Savings Scheme or ELSS are
diversified equity mutual funds providing tax saving benefits. Hence, ELSS schemes are also popularly known as a Tax Saving Funds.
ELSS invests in listed equities and therefore categorised as equity mutual funds. Most ELSS schemes hold a diversified portfolio of stocks, across market capitalisation segments (large-cap, mid-cap, and small-cap) and sectors. The
investment style could be growth or value or even a combination of both these styles, depending on the investment mandate of the scheme.
A distinguishing feature about ELSS is that they are subject to a compulsory lock-in period of three years. This is the lowest lock-in period option amongst all the other tax-saving avenues.
Lock-in means you cannot redeem your investments before three years from the date of your investment. Hence, when you pick ELSS for tax-saving, make sure you buy the best ones having a consistent performance track record and from a
fund house following robust investment processes. Click here to find the best mutual funds within 5 minutes.
application amount for most ELSS is as little as Rs.500, with no upper limit. However, do remember, only a sum up to Rs 1.50 lakh is eligible for deduction under Section 80C. Also, when you invest in ELSS, make sure you have an investment time
horizon of at least 3-5 years. In the long run, a worthy ELSS has the potential to earn luring inflation-adjusted returns.
2. Unit-Linked Insurance Plan (ULIP)
These are insurance-cum-investment plans offered by life insurance companies that enable you to invest in equity and/or debt instruments, depending on the investment
plan/allocation option you choose, and get life coverage (insurance benefit) at the same time – which is usually 10 times the annual premium paid.
The premium you pay, after accounting for allocation and other charges, is invested in equity and/or debt securities. All you have to do is, select the investment plan/allocation option as provided by the Unit-linked Insurance Plan
(ULIP). Generally, fund options are classified as “aggressive” (which invests in equity), “moderate or balanced” (which invests in debt as well as equity), and “conservative” (which invests purely in debt instruments).
ULIPs have a minimum five-year lock-in period, and also have a minimum premium paying term. The overall term of the policy would vary from product to product. But to claim a tax benefit, the policy has to be active for a minimum of five
Well-selected ULIPs can add value to your portfolio in the long-term. In case of any eventuality, the beneficiaries would be paid the sum assured or fund value, whichever is higher.
3. Pension Fund
A pension fund offered by mutual funds can not only be used for tax planning, but even as one of the effective mediums for retirement planning.
Most pension funds are hybrid in nature; meaning they invest in equity and debt in a certain proportion. The return clocked by a Pension Fund depends on the asset allocation the Scheme follows and how efficiently it’s been managed
across the market conditions.
These plans come with a five-year lock-in and an exit load that can extend up to retirement. At the vesting age, you can opt for regular pension by systematically redeeming the units held in the folio/account.
4. National Pension System (NPS)
The National Pension System or NPS is
an investment-cum-pension scheme initiated by Government of India to provide old age security in the form of pension to all the citizens of India in the age group of 18 years to 65 years.
To invest in NPS, you have two types of accounts
- Tier-I Account – This account is a mandatory account and the minimum investment amount is Rs 500 per contribution and Rs 1,000 per year. The yearly contribution, which is Rs 1,000, is a must or the account will be frozen.
And to unfreeze the account, you are required to contribute the total sum of minimum contributions missed and a penalty of Rs 100 per year. The objective of this account is to build a retirement corpus and buy a life annuity. You can operate
this account anywhere in the country, irrespective of your employer and job location.
- Tier-II Account – This account is a voluntary account. To have a Tier-II account, you first need to have a Tier-I account. The tier-II account can be opened with a minimum contribution of Rs 1,000 and yearly contribution
to this account is not mandatory.
Recently, the government took a decision to allow even the contribution to Tier-II account by government employees eligible for a tax deduction under Section 80C, provided they remain invested for
3 years. However, for non-government employees, there is no tax benefit on contributions towards the Tier II NPS Account.
From the Tier-II account, you are permitted to withdraw as and when you wish to. There’s no penalty
whatsoever. So, the Tier-II account serves just like your savings account.
While investing money in NPS, you have two investment choices, i.e. “Active” or “Auto” choice.
Under the “Active”
choice asset class, your money will be invested in various asset classes termed as ECG, viz. E (Equity), C (Credit risk bearing fixed income instruments other than Government Securities), and G (Central Government and State Government bonds).
This gives you the option to decide your asset allocation into these specific asset classes.
In the case of Auto Choice, which is the lifecycle fund, money will be automatically invested based on the age profile of the subscriber.
And if you don’t signify the choice while investing, the Auto Choice will be the default option.
In November 2016, the PFRDA introduced two new investment options called: 'Aggressive Life Cycle Fund' and 'Conservative Life
Cycle Fund'. In the former, you can invest up to 75% in equities, while in the latter, 25% will be parked in equities. The purpose of introducing these additional investment options was to attract young investors who can afford to take the
Non-Resident Indians (NRIs) can now actively participate in NPS. In addition to the deduction under Section 80C, if you are a corporate sector employee and your employer contributes to your NPS account up to 10% of your salary
(Basic Salary + Dearness Allowance), then you can avail of a deduction under Section 80CCD(2) over and above the permissible deductions under Section 80C.
Similarly, an additional deduction for investment up to Rs 50,000 in NPS
(Tier I account) is available exclusively to you as NPS subscribers under subsection 80CCD (1B) for the contributions made. This is over and above the deduction of Rs 1.5 lakh available under section 80C of Income Tax Act, 1961.
For a risk taker, there are a number of worthy tax-saving options. But avoid keeping tax planning for the eleventh hour do it today so that you can make a prudent choice.
Happy Tax Planning and Investing!
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.