How to select the best tax-saving plan.
Harsh is a salaried professional n the 30% tax bracket. The tax saving season is on and he is evaluating his investment options. As an investor, he believes he should look for options that not only help him save tax but also generate tax-free returns. If the income earned is taxable, the scope to make money over the long run gets constrained as the taxes eat into the returns and adversely impact compounding benefits. For instance, his post-tax return on a 5-year bank fixed deposit of 7% will roughly come down to 4.9% per annum. He wonders what would be the right products for him this year.
PPF is an ideal choice for investors who do not want volatility in returns akin to equity. However, for long-term goals and to mitigate risk of high inflation, some equity exposure may be considered, preferably through equity mutual funds, including ELSS tax saving funds and not depend entirely on PPF. Having said that, ELSS does not enjoy the EEE (exempt- exempt- exempt) benefit any more. Harsh will have to pay a 10% tax on long-term capital gains exceeding Rs 1 lakh in a financial year. Moreover, dividends from ELSS will also be taxable in Harsh’s hands at his marginal rate of taxation (30%). Hence, for someone investing in ELSS, choosing the growth option over the dividend option will yield better tax-effective returns. After the initial three-year lock-in period ends, Harsh may continue with the ELSS investments similar to any open-ended mutual fund scheme.
Ulip is a hybrid product, a combo of protection and saving. As per the latest provisions, if the annual premium of a new Ulip investment is more than Rs 2.5 lakh, the maturity proceeds will no longer be tax exempt. In case Harsh is comfortable investing in ELSS and simultaneously holds a pure term insurance plan, he need not buy any Ulips. Also, Harsh must ensure that the goal timeline for saving through Ulips must be at least 10 years.
Traditional insurance plans could be an endowment, money-back or a whole life plan, which have a savings element and come with a fixed term and a fixed sum assured. While the premium paid qualifies for tax benefit under section 80C, the maturity value and the death benefit is tax-free. However, the traditional insurance plans typically yield low returns and are largely in the range of 4-7% per annum and provide limited scope for compounding over a period of time. The same may stand true for other guaranteed products that also provide tax exemption u/s 80C. Sukanya Samriddhi Yojana (SSY) offers the highest tax-free return, currently in the government saving schemes category, with a sovereign guarantee and comes with the exempt-exempt-exempt (EEE) status.
For most investors like Harsh, choosing tax savers that come with EEE status would be ideal. Both the principal invested and the returns are tax exempt under the Income Tax Act. Having said that, while choosing a product, he must also be mindful of its overall return and wealth-building potential.
Source: The Economic Times
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