How to Save on Tax Returns Using Investments?

March is here and this month just does not only bring the end of spring and start of mild summers in India, but there are also other changes that take place. Don’t believe us? Just ask any working professional, business owners or entrepreneurs, maybe you’re one of them.

As March is the last month of the financial year, many people rush for tax saving instruments and investments. But as they say, things done in a state of haste do not yield fruitful results. Many taxpayers in India are confused or don’t have the proper knowledge about tax consequences and financial planning.

So what can be done when a tax paying individual is looking to save money through investments?

Short Answer: Invest in Mutual Funds!

How will mutual funds help me in saving tax?

This question is just the right beginning for you, and we’ll show you through explanation and data why people should invest in “Tax Saving Mutual Funds”.

Tax Saving Mutual Funds or ELSS (Equity Linked Saving Schemes) are equity funds which are diversified. These funds invest most of their corpus in equity or equity related products. It is a great way to save income tax under Section 80C of the IT Act.

Who should invest in Tax Saving Mutual Funds?

These tax saving mutual funds work best for:

– Salaried Professionals: Employee provident fund is a fixed income product, but tax saving mutual funds bridges the gap between risk and returns. They also have the shortest lock-in period of 3 years, when compared to other instruments such as Unit Linked Insurance Plans (ULIP), with a lock-in period of 5 years and the National Pension Scheme (NPS), which is more for retirement plans for individuals.(NPS matures when an individual reaches an age of 60 years).

– New to investment: If you’re new to the world of investing, you can choose tax saving mutual funds, and you will get to experience a hybrid of mutual funds and equity.

A certain degree of risk is always associated with equity investments, but its effect begins to negate when you’re in for a long run. For beginners, the best way is to invest through monthly SIPs (Systematic Investment Plan).

Advantages of Tax Saving Mutual Funds:

– Lowest Lock in period: No other financial tax saving instruments comes close to tax saving mutual funds when it comes to the lock-in period of 3 years. Unit Linked Insurance Plans (ULIP) has a lock-in period of 5 years, and the National Pension Scheme (NPS) matures when an individual reaches an age of 60 years.

– A boon when it comes to tax savings: It is one of the best tax saving/investment options around, which offers INR 1,50,000 a year under Section 80C of the IT Act. This helps you save upto INR 46,800 a year in taxes. Any amount you earn from your investments above INR 1 lacs is taxed as Long Term Capital Gain (LTCG) at a rate of 10% at maturity.

– Ease of investment: One of the best tax savings options for beginners, which can be done through monthly SIPs.

– Higher Post Tax Returns: Tax saving mutual funds offer more returns when compared to Public Provident Funds (PPF) and Unit Linked Insurance Plans (ULIP).

Let’s take a look at the data!

FinMapp provides various Tax Saving Fund for your benefits. Some of the tax saving funds available at your disposal are:

A deeper look at HDFC Tax Saver – Growth Plan shows a 1 year return of +13.94% and a 3 years lock-in period would provide you with +12.15%.

You can begin investing with a minimum one time investment of INR 500, or even a monthly SIP with the same amount.

Things to know before you invest in Tax Saving Funds:

– Pay attention to the expense ratio and decide accordingly, as a lower expense ratio translates to higher returns for you.

– Make history your ally and choose fund houses which have a consistent performance over a period of time, e.g. 8 to 10 years.

– Your fund manager should have relevant skills and experience to choose the right stocks for you, which will result in the creation of a strong portfolio.

– Fund Returns should be high on the list of considerations. Compare competitors and their fund returns, if your fund beats them, then it is delivering high returns.

Bottom of the line:

We hope we were able to provide you with some valuable insights on “How to Save on Tax Returns Using Investments?”

Tax Saving Mutual Funds or ELSS is one of the most popular tax saving funds in India, for both salaried professionals and beginners. It is imperative to make an informed decision, and then to invest in the right one according to your financial goals and needs.