InvestorQ : Among the various tax schemes that are available what are the best tax schemes that you would suggest that I should use?
prachi Patwardhan made post

Among the various tax schemes that are available what are the best tax schemes that you would suggest that I should use?

3 years ago

How do you go about selecting the best tax saving schemes? As the tax saving season approaches, the big question is how to select the best tax saving option. There are 5 questions that you need to ask yourself. Firstly, is the tax break on this asset sustainable in the long term? Secondly, does the tax-saving instrument give tax benefits at all the 3 levels viz. investment, returns and redemption? Thirdly, does this instrument help me to create wealth in the long run or lock in assured returns? Fourthly, does the particular tax saving instrument that you are considering fit into your overall financial plan and your long term goals. Lastly, does this product give you an enhanced tax benefit now available with other tax-saving instruments?

Based on the above criteria, we have identified 5 investment and tax saving ideas for you to make the best of this tax season. A word of caution! It is always better to plan your taxes well in advance and invest in a systematic manner. You can, at least, make that your driving force in the next financial year…

Get the power of the Mutual Fund ELSS schemes…

A lot has been written about ELSS funds. They offer tax benefits under Section 80C of the Income Tax Act, which has an outer limit of Rs.150,000 per annum. What is special about the ELSS is that it is, perhaps, the only tax saving instrument that also allows you to create wealth for yourself in the long term. Traditionally, most ELSS schemes have managed to outperform because the compulsory 3-year lock in induces and instils a certain long term approach in the investor as well as the fund manager. With the government keen to increase retail participation in equities through the mutual funds route, ELSS may see additional tax benefits in the coming years. For its combination of tax efficiency and long term wealth creation, ELSS remains our foremost picks among tax saving instruments for the financial year 2017.

You can get stability and security with Tax saving Long Term Bank FDs…

You logical question may be why are we suggesting a long term FD at a time when rates are on the way down. These long term bank FDs were included as part of the Section 80C list a few years ago. The long term FDs issued by banks will have a lock in period of a minimum of 5 years. There are 2 strong reasons why we recommend long term FDs as a tax saving instrument. Firstly, rates are on the way down and the current surge in liquidity post demonetization means that we may see further rate cuts. Thus the current rate of 7.5% approximately may be a good level to lock in for the long term. Secondly, the tax break really enhances the yield on the FD. For example, when you invest Rs.10,000/- in this long term FD, you actually invest only Rs.7,000 after considering the 30% tax rebate. Thus on an investment of Rs.7000, you earn Rs.750 per annum result in an effective yield of 10.7%, which is extremely attractive in the current scenario. However, a word of caution! Interest on these FDs is taxable and hence you must limit the amount that you invest in this instrument.

If you are a senior citizen then Senior Citizens Savings Scheme (SCSS) is for you

This is an outstanding tax saving product for senior citizens who are above the age of 60. The government has chosen to keep the interest rates on this scheme about 100 basis points higher than normal FDs and the government also guarantees this return for a period of 5 years. Additionally, the interest is paid out quarterly so it is extremely useful for senior citizens and pensioners who are relying on their investments to generate that extra return for their daily needs. However, this has an upper investment limit of Rs.15,00,000 and the interest is also taxable. But for middle class retirees and pensioners, this offers a good means to earn extra returns with no risk.

For additional benefits, check out the New Pension Scheme (NPS) under Section 80CCD…

This is a great product for combining annual tax benefits with planning for your sunset years. Under the NPS scheme investors can get an additional exemption of Rs.50,000/- over and above the exemption of Rs.150,000 under Section 80C. Remember, this benefit under Section 80CCD is only available for NPS schemes and that too for investments under Tier I scheme of the NPS. The beauty of the NPS is that the investor can choose the mix of debt and equity that he requires and can also modify this combination over a period of time. The only thing one needs to be cautious is that the maturity amount is taxable in the hands of the recipient. However, the enhanced exemption under section 80CCD makes the NPS a worthwhile addition.

Make the best of your home by leveraging your home for tax benefits…

Many of us do not realize but your home can be one of your best investments from a tax saving perspective. Consider the following benefits that your home proffers. Firstly, the interest paid by you on your home loan gives a special exemption u/s 24 of the Income Tax Act up to Rs.200,000 per annum. Additionally, the principal repayment of the home loan is also exempt up to Rs.150,000 per annum. In addition to the interest and principal, the registration and stamp duty charges paid by you can also be claimed as an exemption under Section 80C in the year of payment. You can also rent out your second apartment and claim unlimited exemption under Section 24. Finally, if you make a capital gain from selling your property, you can save tax by reinvesting these capital gains in specified capital gains bonds issued by the government approved institutions. All these benefits make the house property one of the most attractive tax saving options.

Remember that the above are only an illustrative list and not exactly an exhaustive list. But they will surely give you a quick insight into how you can get more value for your tax saving investments. Some of the tax-saving schemes are extremely attractive in post tax terms. Till the time these benefits are available and make sense to your financial planning, you can as well make the most of it.