1. Save maximum tax: Income Tax Act of 1961 allows certain deductions from taxable income which can enable tax payers to save a considerable amount of income tax. Section 80C of Income Tax Act allows investors to claim deductions from taxable income by making investments in schemes eligible under this section like PPF, NSC, life insurance premiums, home-loan principal payment, tax saver FDs, mutual fund Equity Linked Savings Schemes etc.
The entire amount of investment subject to a cap of Rs 1.5 lakhs per financial year can be claimed as deduction from your taxable income. For investors in the highest tax bracket, investors can get tax savings of up to Rs 46,800 in FY 2019 (AY 2020). In addition to Section 80C, investors can also claim a further deduction of Rs 50,000 by investing in National Pension Scheme (NPS) u/s 80CCD. Investors can also claim deductions u/s 80D for medical insurance premium subject to a cap of Rs 25,000 for ordinary tax payers and Rs 50,000 for senior citizens. In addition, tax deductions can also be claimed for education loan interest payments (u/s 80E) and home loan interest payments (u/s 24).
Therefore, you must ensure that you are availing maximum tax benefits under various sections as mentioned above.
2. Money must grow: A tax saving tip is that as an investor you must not only focus just on tax savings but also on investment returns. We work hard for money; our money must also work for us. Monies lying in low yielding deposits do not work hard enough because they are often not able to beat inflation on a post tax basis. As per historical evidence, equity has been the best performing asset class in the long run.
If you had invested Rs 1 lakh in equity mutual funds 20 years back, the value of your investment would have grown to over 36 lakhsin the last 20 years. Had you invested the same amount in fixed deposit, gold or silver, your investment would have grown to Rs 3.74 lakhs, Rs 7.17 Lakhs and Rs 5.54 Lakhs respectively.
Please check – growth of Franklin India Bluechip Fund in the last 20 years and comparison with other asset classes
ELSS Mutual Funds orEquity Linked Savings Schemes are multi-cap equity mutual fund schemes, which invest in equity and equity related securities with the objective of capital appreciation by beating market returns over a long investment time horizon.
Accordingly, for investors with high risk appetites Equity Linked Savings Schemes could be the best 80C tax saving investment options because over 5 years or longer investment tenure, Equity Linked Savings Schemes have usually given much superior returns compared to other 80C investment options. There are many ELSS schemes in the market – investors must choose funds based on the long term track record of the fund manager and asset Management Company.
See the list of top performing ELSS Mutual Funds here
3. Make your investment returns tax efficient: The other tax saving tip is that while paying the right amount of tax is the obligation of every citizen, paying more than necessary taxes is undesirable and avoidable, provided you invest wisely. While 80C investments allows investors to claim deductions from taxable income and save taxes, the returns / interest paid by a number of 80C schemes are taxable as per the income tax slab rate of the investor. Interest paid by 80C options like tax saver fixed deposits, NSC, Senior Citizens Savings Schemes etc is taxable.
Capital gains from ELSS schemes were tax free since 2004, but in the 2018 Budget long term capital gains taxation in equity funds was changed. Capital gains from ELSS up to Rs 1 lakh in a FY will continue to be tax free; above Rs 1 lakh capital gains will be taxed at 10%. Dividends paid by ELSS used to be tax free in the past, but in the 2018 Budget dividend distribution tax of 10% has been announced for equity funds. Despite the re-introduction of long term capital gains tax and dividend distribution tax, ELSS is one of the most tax friendly 80C investment options, especially for investors in the higher tax brackets.
See the return of Equity Linked Savings Schemes in the last 5 years
4. Plan your taxes: Tax payers are often seen scrambling at the last minute before the close of the financial year to make their Section 80C investments. Last minute tax planning often results in making sub-optimal investment decisions or even not being able to save the maximum amount of tax due to non-availability of funds at the last minute. A prudent tax saving tip is that you should plan your tax saving investments at the start of every financial year. Tax planning at the beginning of the year not only saves you from the last minute hassles, it also enables you to earn higher returns through interest accrued for the full year or in case of ELSS, the full price appreciation during the year.
Please read: Benefits of investing in ELSS mutual funds
If you do not have sufficient lump sum funds to make your full tax savings investment (for the year) at the start of the year, the tax saving tip is that you should invest in ELSS from your regular savings through Systematic Investment Plan (SIP). SIP is not only a convenient way of investing; it also enables investors to get superior returns in the long term through rupee cost averaging. Another advantage of tax saving through ELSS SIP is that, once you setup the SIP, you do not need to plan tax savings every year because the SIP will continue till as long as you want.
You must read: Should you invest in lump sum or SIP in ELSS mutual funds
“While every tax payer dreams of savings maximum taxes and pay the minimum amount of tax, it is not everybody’s cup of tea as it requires lot of planning and strategy. The 4 tax saving tips that we shared here will not only help you save you maximum tax but may also help you get superior returns on your tax saving investments”.
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