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  • How to Invest Your Money Wisely to save Maximum on Income Tax

    Published on February 8, 2019

    Tax season is around the corner and most taxpayers would be contemplating the best tax saving options for the subsequent financial year. Who wouldn’t prefer an option that would not only let them save on tax, but also provide tax-free income? It’s essential to consider important aspects like returns, safety, liquidity and the amount of taxes imposed on returns. Getting substantial returns without losing much money in taxes is important to make the most of this opportunity.

    The interest obtained by investing in schemes like Senior Citizens’ Savings Scheme (SCSS), National Savings Certificate (NSC) and depositing for a period of 5 years in banks and post office won’t be so lucrative. This is because the interest accumulated is liable to taxation as the amount is labelled as your income. The interest income will progressively become a tax liability with each passing year outweighing the current year savings. It’s recommended that salaried professionals and businessmen select tax savers that fall under the E-E-E status. Investing in such plans would provide you with EEE benefits i.e.  Exempt-exempt-exempt status on the earned income.

    Following are some schemes that’ll assist you in making tax savings and earning tax-free income. Each policy has its own distinct features and hence choosing the right one is of paramount importance.

    Unit Linked Insurance Plan

    Also known as ULIP, this is a hybrid plan comprising of saving and protection. It provides life insurance and helps you funnel your savings into a wide array of market-linked assets for accomplishing long-term goals. This scheme provides customers with about 5 to 9 fund options with differing asset allocation ranging from equity to debt.

    The duration of ULIP can be from 15 to 20 years or more with the lock-in tenure being 5 years. On maturity, the fund value will be tax-exempt making it profitable for clients.

    Traditional Insurance Plans

    These insurance plans can come in the following types: money-back, endowment or lifetime plans. Traditional insurance plans come with a fixed assured sum of money and a specified term. Your age at the time of application, plan type and duration will have a bearing on the premium. You will be required to pay premiums annually until maturity. However, there are a few plans that come with a limited premium payment option, wherein payments can be discontinued with the policy duration continuing over an extended period of time.

     Equity-Linked Savings Schemes

    Also commonly known by their abbreviation ELSS, these schemes fall under the category of equity mutual funds and possess two differentiating features – Firstly, the tax benefit stipulations are covered under Section 80C of the Income Tax Act, 1961; the limit being up to Rs. 1.5 lakh per year and secondly, the lock-in tenure for the amount invested is 3 years.

    This option is offered by every mutual fund house and generally falls under the heading ‘tax-saving’ to differentiate them from other mutual fund schemes. The returns are completely determined by the equity market performance and are neither fixed nor assured. This is a long-term investment option and it’s suggestible that you select the growth option instead of the dividend alternative for obtaining tax-effective returns.

    The common phrase, “Don’t put your eggs in one basket” holds true for ELSS and its better to diversify your investment across different offerings. This will help you not just avail long-term benefits, but also assist in mitigating risks. ELSS is one of the best tax savings options according to many experts.

    Public Provident Fund

    The PPF scheme, 1968 is among the most popular avenues for savings and is still preferred by many contemporary investors. After all, the returns are devoid of any taxes and a sovereign guarantee is provided on the principal and interest amounts. It presently offers 8 percent per annum, which is subject to change every 3 months. This means if you’re paying 31.2% tax, it implies approximately 11.62% taxable return.

    One can easily open a PFF account under their name or on behalf of a child who is a minor. What’s even better is that the minimum balance required to keep this account functioning is just Rs.500. You can deposit a maximum amount of Rs. 1.5 lakh in a financial year with this amount being the combined self and minor account limit. The PPF account can be opened in any designated bank branch or post office and is a 15 year scheme that can also be extended indefinitely every 5 years. Your PFF account can be easily transferred between banks and post office without any hassles.

    Employees’ Provident Fund

    EPF is beneficial for salaried individuals as it helps save tax through involuntary savings and accumulating tax-free corpus. Both the employer and the employee contribute an equal share of 12% of the basic salary towards the EPF account although only 3.67% of the employer’s contribution goes into EPF.

    Your contributions as the employee will qualify for tax benefits under Section 80C of the Income Tax Act, 1961 with a maximum limit of Rs. 1.5 lakh per year excluding the employer’s share. However, tax-free interest can be obtained on both the employer-employee contribution as announced by the government each year. The current interest rate on EPF is at an attractive 8.55%.

    Consider the above mentioned online investment options and gauge which one is better for you. Invest wisely and make sure to take advantage of these plans in a calculated manner. Now that you know a lot about how to invest money, the ball is in your court.