Do’s and Don’ts of Tax Savings as you Invest
Updated: Jan 29
Do you break into a little sweat when it is time to file taxes? What if tax season was a blessing in just an irritable disguise? You earn, you have to pay taxes. The part of your income that you can save by investing in some schemes are called tax savings as allowed by the government of India. Who wouldn’t want to make the best of tax savings?
Why does the government encourage you to do this? Because by encouraging you to save and invest, you develop a smart habit and as many like you do the same, the country benefits, and so do its citizens.
A good portion of the risk you take by investing in equity related schemes is one way subsidised by the tax benefits that you enjoy. Your risk is lessened and your rewards are more.
So if you are a risk-averse first-time investor looking to start investing in stock related investment schemes, this is a good way to start and use these benefits.
What does investing mean? It is a way of growing your savings. A truly rewarding investment is the one that will grow more than the rate of inflation. Whatever the means you invest in, it should give you money that will be worth even when things get expensive.
One of the best ways to do that is through Mutual Funds.
Coming back to our not-so-favourite season, taxes. Some reasons why tax savings are the best way to start investing:
The very immediate benefit: you pay less tax: This is the extra brownie point over and above the money you would gain from investing. An immediate return than you can count on.
You can start small: With tax savings, you need to invest only an amount that is required for your goal. Which means till you learn the ropes, you can start investing in smaller amounts.
An opportunity to learn to invest: When you have a stake in something, it sparks your interest. So as a new investor if you were looking to learn so you can be confident about investing, here is your chance. From your experience of investing initially to save tax, you start to learn about the other investment options for your future.
The preferred investment option if you are looking to make an investment in the equity markets and benefit from the tax deductions is the Equity Linked Savings Schemes or ELSS.
The preferred investment option if you are looking to make an investment in the equity markets and benefit from the tax deductions, is the Equity Linked Savings Schemes or ELSS.
ELSS is a type of mutual fund that invests money into the equity market. These funds have a lock-in period of 3 years and enjoy a tax benefit where you can claim up to Rs 1,50,000 as deductions from your total income.
In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. A maximum of Rs 1,50,000 can be claimed for the FY 2018-19, 2017-18 and 2016-17 each.
If you have paid excess taxes, but have invested in LIC, PPF, Mediclaim, incurred towards tuition fees etc.and have missed claiming a deduction of the same under 80C, you can file your Income Tax Return, claim these deductions and get a refund of excess taxes paid.
Did someone ask you to invest in a ULIP to save taxes? Unit Linked Insurance Scheme (ULIP) is often suggested to investors looking to avail tax benefits while investing in their wealth creation and savings goals.
ULIP is essentially a combination of insurance along with an investment. From a ULIP, the goal is to provide wealth creation along with life cover where the insurance company puts a portion of your investment towards life insurance and rest into a fund that is based on equity or debt or both and matches with your long-term investment goals.
While ULIPs are a great way to benefit from both life insurance and investment returns, they should ideally only be considered by those investors who do not have a life insurance plan in place or would like a life insurance plan.
As an investment avenue, ULIPs typically do not perform as well as traditional mutual funds and are more expensive given the general expense ratios (an expense ratio is a fee charged by the investment company to manage the funds of investors) and terms associated with such schemes.
As an investment avenue, ULIPs typically do not perform as well as traditional mutual funds and are more expensive given the general expense ratios and terms associated with such schemes.
The Usual Suspects:
Not all investments made by an investor can be used to avail tax benefits. If you do not want to invest in equity-related investments, there are a host of options that they can consider that offer similar tax benefits. The other popular and effective options include:
– Employee’s share of PF contribution
– National Savings Certificates
– Life Insurance Premium payment
– Sum paid to purchase a deferred annuity
– Five-year deposit scheme
Here’s hoping that you have great tax savings towards the end of this financial year, and a great start to your investing journey!
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