Your Tax Savers for 2016 – 2017
Many investors find Fixed Deposits and Insurance the easy and hassle free way to invest due to time constraint. But the post-tax returns from Fixed Deposits in the 30% tax bracket comes down to a meagre 5% or lesser. The life insurance plans offer stingy returns along with the prolonged period of investment till maturity.
A little presence of mind and being alert can fetch you better returns with safety, liquidity, flexibility, transparency and taxability of income. With e-KYC facility and paperless investing options on-line has made the process all the more easy.
Here are Five options for Tax Saving:
Over the past three to five years, ELSS (Equity Linked Saving Schemes) has been rated to be on the top of the tax saving schemes. With annual returns of more than 17% in the recent years, its performance is over and above the orthodox investments such as Fixed Deposits and Life Insurance. It has a lock in period of only Three years, the shortest till date. They score high on costs, transparency, taxability and liquidity. Long term capital gains from equity funds are exempt from tax, hence returns from ELSS funds are tax free. SIPs (Systematic Investment Plans) are the best way to invest in equity funds. With a little planning at the beginning of the financial year, SIPs can be done to avoid the crunch at the end of the year. Mutual Funds are very well regulated and transparent. Mutual fund charges, portfolios and transactions are in the public domain.
The NPS (National Pension scheme) is on the second in the list with a return of 12.5% for the past five years. The money is locked in this scheme till you retire. If you want to save more, over and above the 1.5 lakh investment limit under Section 80C, you can cut your taxes further by investing in the pension scheme limited to Rs. 50,000 in a year. Currently, from the announcement in the last Budget, 40% of the return is free from income tax.
ULIPs (Unit Linked Insurance Plans) is a life insurance product, which provides risk cover for the policy holder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds. Charges are levied on cancellation of Units leaving a return of about 10%. SEBI’s cap on charges, easy on-line access to ULIP for the buyers has made it attractive and user friendly.
The EPF (Employees Provident Fund) linked to the salary is an individual’s contribution and is tax free. One can increase the contribution by opting for VEPF (Voluntary EPF) through salary. For persons not covered by EPF, PPF (Public Provident Fund) is a suitable alternative. The interest rate of 8% keeps it ahead of inflation. The PPF rate is no longer fixed and is likely to fluctuate with the ups and downs of interest rates. Even so PPF will yield higher returns than bank deposits.
The Sr. Citizens’ Saving Scheme is the best option for tax saving with returns of 8.5% paid out quarterly on fixed dates irrespective of the date of joining the scheme. With an investment limit of Rs. 15 Lakh, it has a lock-in period of five years and can be extended for another three years after maturity. It is a good option for citizens above 65 years.
Five Important Tips for Investment in ELSS:
Waiting till the end of the financial year is a common habit of investors which puts them in dilemma of choices to invest between funds which could give great returns.
Some common mistakes that investors tend to make can be avoided:
|Many investors tend to invest in the last three months of the financial year. The burden becomes heavy with lump sum investments to be made in ELSS to save tax.||SIP (Systematic Investment Plan) is a better option with almost a whole year ahead for investments to be planned in small amounts.|
|With only three months in hand at the end of the financial year, investors tend to invest in the best performing funds at the time.||ELSS funds are equity schemes. Stability of the returns is more important than the large amount gained in short term. Take a look at the performance before you make a choice.|
|Dividend based mutual funds is another way to gain profits. Since the dividend gained is tax-free in the hands of the investor.
||Don’t choose the dividend option. Even worse is the dividend re-investment plan. Every time the re-investment is made, the three year lock-in period starts all over again.|
|Should you ignore smaller funds?||Take a look at the performance of smaller funds. Base your choice on the performance.|
|Redeeming your money after the three year lock-in period.||Unlike NSC and fixed deposits which have a maturity period, ELSS schemes are long term performers and redemption of your money is not necessary after the three year lock-in period. As regular equity funds, hold them for the long term for decent returns.|
These are general guidelines and you may consult your Chartered Accountant or your Financial Planner to help you in tax planning at the beginning of the year to avoid last minute rush.