Tax-Saving Options that Save Tax and Grow Your Wealth

If you are reading this, you are likely to be someone whose income exceeds the threshold of Rs 2.5 lakhs for paying taxes. There are some legitimate ways of saving taxes and the good thing is that most of them also help you grow your wealth. These options usually have a lock in period and vary in the nature and amount of return they provide. You must also remember that each of these alternatives also serve specific purposes and tax saving is not the purpose but an ancillary benefit of that.

What is pre-determined and what is optional. EPF, Home Loan repayment and Tuition Fees are pre-determined. Add them up and see how much of your 1.5 lakh limit is utilized.

ELSS Tax Saving Mutual Funds

ELSS or Equity Linked Saving Schemes are a kind of equity-linked mutual funds.  As they invest in equity or stocks, ELSS funds have the ability to deliver superior returns - 14-16% over the long term. That’s a full 6-8% above inflation. This return is not guaranteed though but historical evidence suggests that these returns are achievable over the long term.

Public Provident Fund

PPF is a good option if you are looking for an option with certain returns.

Your PPF investments earn interest at a rate announced every year – currently 8.7%. PPF return is therefore mostly at par with inflation. However, it is tax-free and you can do a lump sum or small regular investments.

The duration of a PPF account is 15 years which is extendable by 5 years at a time. You cannot withdraw money from your PPF account except under certain conditions but not before 5 years.

You can invest in PPF through a bank or Post Office. Ability to invest online is limited.

Life Insurance Premium

This was almost the default Tax Saving Plans option for years, however, over the last few years; most informed investors have learnt the perils of choosing this option

There are 2 kinds of Life Insurance Policies:

Pure risk also called term life which ensures a risk to the life of the insured

Risk+ investment: which pay you back money over time

While pure risk life insurance is something everyone with a dependent must have, it’s not an investment. Life insurance is an expense- something you pay to ensure that your dependents are not left stranded should something unfortunate happens to you.

National Pension Scheme

National Pension Scheme is a lot like investing in mutual funds with its Safe, moderate and Risky options. The returns are not guaranteed.

You cannot withdraw until 60 and the corpus amount must necessarily be invested in an Annuity. The withdrawals are also taxable.

Pension Funds

Pension funds are designed to provide you with an income stream post retirement. They come in two flavors: Deferred Annuity and Immediate Annuity.

For deferred annuity plan, you invest annually until your retirement. Once you reach your retirement, you have can withdraw up to 60% of your accumulated corpus and have to re-invest the remaining in an annuity fund which will give you a monthly pension.

When it comes to immediate annuity plans, you invest a bulk amount one-time and get monthly pension from the next month itself. You would typically use these to invest your retirement corpus.

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