The dialogue in the movie Spiderman “With great power, comes great responsibility” holds true when you rise up the income ladder and attract a higher pay. With higher pay, you also attract a new challenge – higher taxes. Here’s another quote from Benjamin Franklin, “In this world, nothing can be said certain, except death and taxes.” So, it is clear that we cannot avoid tax, but we can surely reduce the tax liability under the provisions of Income Tax Act.
One of the most important sections of the Income Tax Act for saving taxes is Section 80C. In order to avail benefits under this section, the Income Tax Act has listed several investment options and payments. These are deductions that investors can avail of, to effectively reduce their tax liability. The total limit for deductions under Section 80C for the Financial Year 2015-2016 is Rs.150,000.
Why ELSS is the best taxing saving option among investments
If you are interested in saving tax, then it is a wise move to invest in schemes that attract tax benefits. From all the section 80C investment options available like PPF (Pubilc Provident Fund), 5 year bank deposits, NSC; etc, ELSS has the least lock-in period of just 3 years. The other investment options have a minimum lock-in period of 5 years.
Through an ELSS tax saving mutual fund, you get the opportunity to invest in equity markets. With long-term financial horizon in mind, ELSS provides maximum benefits in the form of wealth creation, capital appreciation, retirement planning and inflation-adjusted earnings. Besides, you can earn dividends from time to time, which you can choose to withdraw or reinvest into the fund. Ideally, the ‘growth option’ is better than ‘divided option’ for faster capital appreciation.
Let’s say you have invested Rs. 100,000 each year in a PPF and a tax-saving mutual fund (ELSS). While at the end of 15 years, PPF returns will have touched Rs.32 lakhs, the returns from your ELSS will be thrice as much, viz; Rs.84 lakhs. No other form of investment can match the power of an ELSS mutual fund, if you consider that you invest small blocks of amount every month in the form of an SIP (Systematic Investment Planning).
An ELSS usually has at least 80 percent of asset allocation in equity which augurs well for the young investor with a high risk appetite. The risk is worth it over a long-term (beyond 7 years) because equity-based mutual funds have outclassed every form investment, including reality, on a long-term basis.
Many of us tend to defer tax-related investment decision till the company HR asks for investment proof for tax deduction. At that time, you may find it tough to accumulate the required money to invest. Instead, it is always better to invest through an SIP in a well chosen tax-saving mutual. SIP has manifold benefits – it is the best way to enter into an equity market without burning your fingers, you can benefit from rupee-cost averaging and you can approach tax—planning in a strategic and structured manner.