“In this world, nothing can be said to be certain except death and taxes” – Benjamin Franklin
While taxes are certain, there are legitimate ways to reduce taxes. I firmly believe that as responsible citizen, I must pay a fair share of taxes. However, I also believe that we owe it to our family that we don’t pay a single rupee of extra tax. We must use all legitimate options to avoid or defer taxes.
Tax saving options under section 80C in India
Section 80 C offers us some options to save taxes. We can invest up to 1.5 lacs and get appropriate tax saving option. Now, all tax saving options require some lock-in period for your investments. Basically this means that you can withdraw the money invested for tax saving purpose only after a certain period of time (for example – 15 year lock-in for PPF).
Now there are certain investments which are eligible for inclusion in 80C. For example, your EPF contribution (every month your employer deducts 12% of the basic salary), principal payment on home loan, life insurance or certain unit linked life insurance premium are eligible for inclusion in 80C tax saving options.
As there is a lock-in in 80C investment options, it is better to utilise above provisions and invest only the minimum amount in other 80C tax saving option. For example, if your PF contribution is 40,000 and life insurance premium is 15000, you have already 55,000 worth of eligible 80C investments. Total limit is 1.5 lacs. So, you invest only 95000 in other tax saving option.
The main idea behind above is to avoid too much investments in instruments that have lock-in period.
Evaluation of tax saving options
There are 5 parameters we can look at to evaluate tax saving options:
- Cost – how much we are charges?
- Lock-in period– How long, we can not withdraw our money?
- Expected post-tax return– One of the most important factor. As the money is locked-in for long period, we should get higher post tax return.
- Risk of loss – How safe is the investment?
- Ease of investment and redemption– How can we invest in these tax saving instruments
Before choosing the option best for you, we present a comparison of main tax saving options across 5 main parameters.
Best option for risk-averse investor: If you do not want any risk of loss and have a long term holding period, PPF is your best bet. 5-year fixed deposit could be another safe option for people who want shorter lock-in period.
Best option for regular investors: While returns available in PPF and fixed deposits are good, they often may be less than the rate of inflation in future. This means that purchasing power of your money is declining. Investor looking to beat inflation should be ready for some volatility. Equity linked mutual funds are transparent, low cost and shorter lock-in products which may help you in saving taxes as well as beating the inflation.
So, from my perspective, equity linked tax saving mutual funds are best option. As I say with equity investments, always invest systematically through SIPs. With tax saving mutual funds, as the lock-in period is 3 years, you can just redeem and invest again in the same or new fund. So, effectively, you won’t have to put new money in tax saving options after initial 3 years.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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