Everybody wants to earn money from the share market in India but most of them forget an important aspect that can significantly impact your investment returns – taxes.
We all know that taxes can eat into our hard-earned money, but you can minimize that bite with tax-efficient investing. If you know how to navigate taxes wisely, you can optimize your returns on investments.
Let’s discuss Tax-Efficient Investing to save your taxes along with optimizing your returns on investments.
Understanding the Basics of Tax-Efficient Investing
When it comes to investing, taxes play a crucial role in determining your overall returns. To make the most of your investments, it’s essential to grasp the basics of tax efficiency. So, let’s break it down for you:
- Taxable Income: Your taxable income is the amount you are liable to pay taxes.
- Deductions: Deductions are the exemptions available under the Indian income tax act such as Section 80C, 80D, and more, that can help you reduce your tax liability.
- Taxable Returns: Taxable returns are those returns where you have to pay tax on the maturity of an investment scheme.
How to Invest in Tax-Efficient Investing Schemes
Step 1: Open a Demat Account
You need a demat account to invest in different tax-saving investment plans such as ELSS funds, SGBs, and PPF.
According to a research report published by InvestingExpert, Zerodha, and Groww are the top brokers in India with the highest number of active clients.
Especially, Zerodha offers free equity delivery that can help you save lots of money without paying any brokerage on stock investment. Both brokers don’t take commissions for mutual funds investments which further leads to some savings.
Step 2: Research Tax-saver Investment Options
You can search for different tax-efficient investment options, including ELSS mutual funds, or NPS to minimize taxes. Look for investments that offer tax benefits as well as good returns.
Step 3: Invest the money
Once you have selected the tax-efficient investment plan that aligns with your goals and risk tolerance, it’s time to invest the money as per your investment goals as well as the amount you can save on taxes.
Top 3 Tax-Efficient Investment Schemes with Optimize Returns
Let’s explore some tax-efficient investing methods that can help you optimize your returns as well as save taxes.
#1. Equity-Linked Savings Scheme (ELSS)
ELSS funds primarily invest in equities or equity-related instruments. ELSS comes with a lock-in period of three years, which is the shortest among the various tax-saving investment options available in India.
Money invested in ELSS funds is eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. This deduction helps reduce your taxable income, potentially lowering your overall tax liability.
ELSS offers a unique combination of tax benefits and the potential for wealth creation, in the past 3 years, ELSS funds have generated an average return of 29% p.a. Which is the highest among the other tax-saving schemes.
#2. Public Provident Fund (PPF)
Public Provident Fund (PPF) is a popular long-term investment option in India that offers you the opportunity to save for your financial goals while enjoying tax benefits.
PPF is currently giving a 7.1% annual return on your investment but it comes with a lock-in period of 15 years. Though it’s a long tenure, the extended lock-in period encourages you to develop a disciplined savings habit and accumulate wealth over time.
Regarding tax benefits, contributions made to a PPF account are eligible for a deduction under Section 80C of the Income Tax Act, up to a maximum limit of Rs. 1.5 lakh in a financial year. The best part of PPF is that the interest earned and the maturity amount are also tax-free, making PPF an excellent tax-saving instrument.
#3. National Pension Scheme (NPS)
National Pension System (NPS) in India provides a comprehensive solution for long-term retirement planning. The NPS is a government-backed pension scheme that aims to provide retirement income to individuals.
The NPS offers attractive tax benefits to investors. Your contributions made towards the NPS are eligible for tax deductions under Section 80CCD(1) of the Income Tax Act, subject to a maximum limit of 10% of the individual’s salary (for salaried individuals) or gross income (for self-employed individuals).
Additionally, an additional tax deduction of up to Rs. 50,000 (beyond 1.50 Lakh under 80C) is available under Section 80CCD(1B) for contributions made exclusively to the NPS.
NPS gives an annual return between 9% to 12% p.a. Lock-in period of NPS is up to 60 years of age or when you get retired.
You can diversify your money as per your risk appetite and the amount of money you can comfortably lock in. For example, you can invest 50% of your money in ELSS funds, and divide rest half portion of your investable money in PPF and NPS depending on your goals.
If you can’t take the risk of losing money, you can prefer PPF and NPS as your primary investment method if you are okay with lower returns.
By following the above-discussed tips, you can minimize taxes and maximize returns, ultimately setting yourself up for financial success.