Saving taxes while building wealth is a financial goal shared by many individuals, and investing in a tax saving mutual fund is one of the most efficient ways to achieve this. This topic is especially relevant as we enter the last quarter of the ongoing financial year. With the growing popularity of mutual funds, Equity Linked Savings Schemes (ELSS) have emerged as a preferred choice for tax-saving investments. These funds not only help reduce taxable income under Section 80C of the Income Tax Act but also offer the potential for higher returns through equity market exposure. An ELSS mutual fund combines tax-saving benefits with long-term wealth creation, making it a versatile option for investors.
Under Section 80C, individuals can claim deductions of up to INR 1.5 lakh annually, reducing their taxable income significantly. Among the many 80C investments options, ELSS stands out due to its short lock-in period of just three years, which is considerably shorter than alternatives like Public Provident Fund (PPF) or Fixed Deposits (FDs). Further, ELSS investments are equity-oriented, offering the potential for higher returns compared to traditional fixed-income instruments.
For those considering mutual funds as part of their 80C investments options, it is important to evaluate the performance, consistency, and risk levels of the chosen schemes. A tax saving mutual fund not only aligns with tax planning but also provides the opportunity to build a diversified investment portfolio. Systematic Investment Plans (SIPs) further enhance the accessibility and affordability of investing in ELSS, allowing individuals to start with smaller amounts and contribute regularly.
In this blog, we explore the top 80C investments options, focusing on how a tax saving mutual fund and an ELSS mutual fund can help you optimise your tax liabilities while growing your wealth. With the right choices and consistent contributions, these investments can be a cornerstone of a robust financial plan.
Tax planning in India is a process which should be started in the early quarters of the financial year so that there is time to sketch out a prudent tax saving strategy. By starting early, there are chances that each option is weighed properly before investing in. However, a common practice in India is to choose an investment option just for the sake of availing tax benefits.
Some of the common factors to consider while choosing a tax saving option is:
- Maximum Tax Saving
- Minimum Risk
- Low cost of investment
- Reasonable Returns
Before we discuss on the top tax saving investment instruments, let us throw light on the most lucrative section of the Income tax Act 1961, Sec 80C. The most obvious reason for making 80C investments is Tax Savings. You can claim up to Rs. 150,000/- deduction from your gross taxable income by investing an equivalent amount in ELSS or other eligible 80C schemes and thereby end up saving up to Rs. 46,800- in taxes (for investors in the highest tax bracket).
Some of the common 80C investment instruments include:
Life Insurance
This investment instrument is a wise option since it offers dual benefits – covers the risk of your life and the premium paid for regular life insurance policies qualifies for tax deduction under Sec 80C up to the extent of 10% of the sum assured (other than contract for deferred annuity). Some of the different kinds of life insurance plans available are:
(1) Term Plan (2) Endowment Plan (3) Unit Linked Insurance Plans (ULIPs) (4) Money Back
Public Provident Fund (PPF)
Contributions made towards PPF offers tax benefits of up to Rs 1.5 Lakh under Sec 80C. The interest earned and received during the time of maturity is tax free. PPF is suitable investment option for conservative investors who want surety of returns and safety of capital. Though it is the most suitable investment option, a lock-in of 15 years; where you can withdraw once a year, from the 7th year onwards with certain conditions makes it least favorable for investors looking for shorter duration.
Fixed Deposit for 5 Years
Unlike conventional FDs, deposits in these are exempt from taxation, under the Section 80C of the Income Tax Act 1961 (An exemption of up to Rs 1.5 lakh). However, the minimum lock-in in these fixed deposits are for 5 years for tax planning in India.
Equity Linked Savings Scheme (ELSS)
ELSS in mutual fund is one of the most preferred tax saving instruments in India as per financial pundits for two major reasons, (i) Its equity based, and (ii) It has the shortest lock-in period comparatively. Being market linked, ELSS are high on risk parameter however; they have the potential to offer better returns.
Another important parameter which makes it the most preferred investment instrument in India is, investments in ELSS can be made in small proportions through SIP instead of paying a lump sum altogether.
Conclusion
For an Indian investor planning to save income tax, the above mentioned instruments are amongst the few that are on offer u/s 80C of the IT Act 1962. Depending upon duration and the risk appetite, one can choose his instruments wisely.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
