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Maximizing Your Finances: A Guide to Effective Tax Savings Plans

Tax Savings Plans
Tax Savings Plans

Tax Saving is an integral piece of your overall investments. Understanding the impact taxes will have on your financial well-being is essential. By investing in Tax Savings investment you legitimately get full benefits of all deductions, exemptions and rebates your tax liability reduces to minimum. By employing effective tax saving plan, you can have more money to save and invest or more money to spend or both. Your choice.

Section 80C Deduction under this section is available only to an individual or an HUF.

Section 80C of the Income Tax Act allows certain investments and expenditure to be deducted from total income up to the maximum of Rs. 150,000 from the Financial Year 2014-2015. This section has been introduced by the Finance Act 2005. Broadly speaking, this section provides deduction from total income in respect of various investments/ expenditures/payments in respect of which tax rebate u/s 88 was earlier available. The total deduction under this section (along with section 80CCC and 80CCD) is limited to Rs. 1.50 lacs only.

Several options are available to claim the 80C deduction. Luckily, since there are no sub limits for these options, you can do all of Rs. 1, 50,000 in one of them or allocate to many. You may also end up investing more than Rs. 1,50,000 in these; however your deduction in total will be limited to Rs. 1,50,000.

Section 80C of the Income Tax Act allows certain investments and expenditure to be deducted from total income up to the maximum of Rs. 150,000 from the Financial Year 2014-2015

Tax Saving Investments in ELSS help to reduce your tax burden and at the same time, aim to grow your money through equity investments.

Benefits from Tax Savings Investments:

  • Reduce Tax Liability

  • Accumulate wealth over a period of time

Tax saving is important, if you are in the highest tax bracket 30%, you save a tax of Rs. 46800/-. Section 80C of the Income Tax Act, 1961 provides options to save tax by reducing the taxable income by up to 1.5 lakh. But, wealth accumulation is also important. Isn't it? That's why these ELSS Investments are ideal for investors who would like to accumulate wealth along with tax saving.

One of the better Tax Saving Investment is ELSS Funds, along with EPF/ PPF. As per the past track record ELSS Funds have outperformed all other Tax Saving Investments historically.

ELSS (Equity linked savings scheme) FUNDS

There are some mutual fund schemes specially created for offering you tax savings, and these are called Equity Linked Savings Scheme, or ELSS. Whatever investments that you make in ELSS are eligible for deduction under Sec 80C. Equity Linked Saving Schemes of mutual funds are nothing but diversified equity funds that have a lock-in period of three years and provide tax benefit and at the same time has the potential to accumulate wealth over a period of time. Since a major portion of the amount is invested in equities or equity stock markets, the earning potential has been historically higher as compared to other tax saving investments. Investors can invest up to rupees 1, 50,000 in an ELSS fund and deduct the investment from their taxable income u/s 80C of Income Tax Act, thereby effectively reducing their tax liability.

Benefits of ELSS Funds

Provide double benefit of tax saving, Tax efficient returns and benefit of investing in equities. Income tax benefit - Investments made in ELSS schemes are eligible for deduction from taxable income under Section 80C of the Income Tax Act. Lower lock-in period - In comparison to traditional investment avenues like PPF, NSC under section 80C of the Income tax Act, ELSS funds have the shortest lock in period of 3 years. Tax-efficient returns. The Gains on the sale of ELSS units are treated as long-term capital gains, and are subject to Income tax of 10% only if the gain is more than 1 lakh. Equity return potential - ELSS funds invest a large part of the fund in equity, which despite short-term volatility has the potential to build wealth over the long term.

Who should invest in ELSS Funds?

  • Investors looking for wealth accumulation over the long term.

  • Investors looking for tax deductions under Section 80C.

  • Investors having Long Term Investment horizon.

There are two ways to invest in ELSS Funds:

  • Invest a fixed amount every month through a Systematic Investment Plan (SIP) in ELSS and ease the burden of large investments towards the end of the financial year.

  • Invest a lump sum amount at any point of time.

Why SIP is the best method for ELSS?

One of the best ways to invest is to save and invest on a regular basis. SIP is an investment method in which an investor invests small amounts in mutual funds at regular intervals.

In addition, SIP helps an investor take benefit of the volatility in the stock markets by rupee cost averaging and helps garner the advantage of compounding. Investment in an ELSS through SIP provides an investor the best combination of tax savings and Rupee Cost Averaging. The minimum investment in an ELSS through the SIP route can be as low as rupees 500.

The lower lock-in period of 3 years in comparison to other tax savings instruments and the potential to take full advantage of growth through equities make ELSS funds a preferred investment option.

Retirement / Pension Funds

A Pension Plan is a retirement tool. A Pension Plan from Mutual Funds allows you to invest either lump sum or regular SIP, helps you in building a retirement corpus, while also giving you a tax deduction upto Rs. 1,50,000/. It also aims to provide a financially secure retirement and peace of mind. So that you can make your dreams a reality and aim to have financial freedom in the post retirement life. Retirement funds normally have a lock in / Exit Load till 60 years of age, which brings discipline and long term approach towards investing.

Advantages of the Retirement / pension Funds from Mutual Funds:

  • No allocation charges/upfront charges typically charges by Unit Linked Insurance Plan (ULIPs) with Units allotted for 100% of the invested amount.

  • Has the potential to grow the corpus over time.

  • Scope for better returns, beating inflation.

  • Offers Liquidity.



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