Choose The Correct Tax-Saving Schemes

Choose the right kind of investment products that are complementary to the overall portfolio and risk appetite

Choose The Correct Tax-Saving Schemes
Yogi Sadana - 11 January 2021

The beginning of each financial year brings in the common predicament of every taxpayer to choose the ideal tax-saving investments. With multiple options available, conflicting advice, and a fast-approaching deadline, the taxpayer often makes frantic decisions on investments to reduce taxes without having sound knowledge of various options available to them. This article highlights some of the most common investment options available to a taxpayer to make that informed decision while choosing the right investment which can get them better returns as well as save on taxes.

To reduce the tax burden on an individual and to promote long-term savings the government from time to time notifies various tax-deductible investment schemes. Generally, these schemes have term lock-ins, promote long-term savings habits, and may give good yields (due to the upfront tax advantage). However, the individual must choose the right kind of investment products that are complementary to the overall portfolio and risk appetite of the investor. Usually, a lot of people make these investments in the last quarter of the financial year which may create timing and liquidity pressure, and hence it is always recommended to plan these investments at the start of the year to provide maximum yields.

For individuals which are looking at low risk and a fixed rate of returns, Public Provident Fund (PPF), Tax Saving Fixed Deposits, and National Savings Certificates (NSC) are quite popular investment options. Investments in these instruments can be done in small amounts. For investors who understand the stock market and have a moderate to high-risk appetite can also opt for Equity Linked Savings Schemes (ELSS). These are also known as tax saving mutual funds, where the fund manager invests in equity and instruments related to equity. One of the best ways to invest in an ELSS scheme is through a Systematic Investment Plan (SIP) which gives two advantages, firstly, helps to average out the purchase cost of the investment over some time, and secondly, it inculcates discipline for the investment. In aggregate, one can invest up to Rs 150,000 per year in these schemes.

Lastly, one can also consider investing in the National Pension Scheme that allows the deduction of an additional Rs 50,000 in a year. The scheme allows the subscriber to invest regularly during their earning life period. At the time of retirement, the subscriber can choose to withdraw a part of the corpus in a lump sum and can choose to invest the remaining corpus to buy an annuity to set regular income from that plan after retirement.

In conclusion, choose the right tax saving investment option that aligns best with your financial objectives and liquidity needs.

The author is CEO CASHe