Vikas Singhania, CEO, TradeSmart, tells us about two such tools, which not only save tax but also give rich returns. These tax saving instruments are no less than other investment avenues. ELSS and NPS are at the top of this list.
An Equity Linked Savings Scheme (ELSS) under Section 80C of the Income Tax Act allows an individual or a Hindu Undivided Family HUF the option of a total tax exemption of up to Rs 1.5 lakh. There is a lock-in period of three years for investing in these schemes. Meaning that after investing in them, you cannot withdraw money for three years. After the expiry of this period, they can either be redeemed or exchanged.
Talking about the benefits of ELSS, it comes in both growth and dividend options. In this, the investor has the facility to invest through Systematic Investment Plan (SIP). These schemes generally see inflow between December and March, as most taxpayers use these three months to plan their tax savings. However, if one utilizes the entire year and starts a Systematic Investment Plan (SIP), the monthly burden on their budget will be less. This will provide them with the advantage of compounding and averaging, providing them with a better entry point.
Tax planning funds give better returns as they invest at least 80 per cent of their assets in equities and equity related instruments. Generally investors use ELSS schemes in two ways. In the first, after the maturity of the plan, they reinvest it. Thus new capital is not included after the first three-year cycle. However, those who earn more income and want to use all tax saving instruments should go for the SIP option. Such investors have used ELSS as a long term investment instrument. For the past five years, the schemes invested in these schemes have given returns of 16-23 per cent compound annual growth rate.
These days the National Pension Scheme is becoming increasingly popular among tax planners and investors. Any person between the age of 18 to 70 years can join NPS. Anyone can continue with NPS till you turn 75 and get tax benefits.
The reason for the popularity of NPS (National Pension Scheme) is that it is generating maximum returns. Investors new to the scheme can now invest up to 75 per cent in equities, and this is the reason we see an increase in investment in the market through pension funds. Top asset management companies selected by the government manage these funds.
Another advantage of this scheme is that you can save tax under three categories. Investments under NPS can be claimed as tax exemption under section 80C up to the prescribed limit of Rs 1.5 lakh. An additional Rs 50,000 can be claimed under sub-section 80CCD (1B). Also we must not forget the employee’s contribution to the NPS account, which is eligible for tax deduction up to 10 per cent of basic salary and dearness allowance under section 80CCD(1) of the IT Act.