How to Save Tax and Create Wealth
In this episode of Dhan ki Baat, Apoorva Tiwari, Chief Operating Officer at IIFL Holdings, helps you identify the best options to save tax and grow your wealth at the same time.
Saving tax, the smart way
Paying your taxes is an inevitable exercise. If you have a source of income, you are bound to pay taxes to the government on your taxable income. The higher your salary, the more you pay.And for those with low salaries, the burden of paying tax can jeopardize the whole financial plan. You need to find ways to save on tax and build your wealth at the same time.
Certain sections of the Income Tax Act entitle you to a tax deduction if you have invested in specific schemes and policies. These policies allow you to multiply your money with time and you can achieve all of your financial goals efficiently.
Invest and save tax
By investing in the following schemes and policies, you can build your wealth over time with just a little investment. The government allows you to get a tax deduction that reduces your overall taxable income and you have to pay fewer taxes even when you get all the benefits of the schemes you have invested it.
1. Mutual Funds, Provident Funds, Insurance: If you invest in any mutual funds, Provident Fund or Insurance of any kind, you can save tax under Section 80C of the Income Tax Act. For example, if you invest up to Rs1.5 lakh in these funds or policies, you can save tax up to Rs46,350.
2. National Pension System: It was launched by the government to provide retirement income to all investors. If you invest in the National Pension System, you are provided with a tax deduction under section 80CCD of the Income Tax Act. For example, if you invest up to Rs50,000 you can save tax up to Rs15,450.
3. Health Insurance: Health insurance provides you monetary benefits related to medical emergencies and hospital expenses. If you invest in a health insurance plan, you can save tax under section 80D of Income Tax Act. For example, if you have invested up to Rs55,000 you can save tax up to Rs16,995.
Overall, if you invest in the policies and schemes mentioned above you can save an estimated amount of Rs78,795 per annum.
Best options to invest with highest returns
There are many investment options available in the market, but few of them can earn you a hefty return and let you save tax at the same time. Here are the best options to invest your money:
- Equity Linked Savings Scheme: ELSS is one of the best investment options with the highest returns and lowest lock-in period. It can give you a return of up to 19.6% as compared to the 8.6% of Public Provident Fund, 8.4% of National Savings Scheme, 8.4% of Bank Fixed Deposit and 8.7% of EMP Provident fund. However, you need to keep in mind that you cannot withdraw all of your money from the corpus in one go before the retirement age except in special circumstances. The return maybe a bit lower as the government has lowered the interest rates.
- SIP in ELSS: Another good option is to invest in ELSS via SIPs. For example, a SIP from May 22, 2007 to May 22, 2017 can yield you Rs44.5 lakh with only a monthly investment of Rs5,000. During this 10-year period, your total investment was just Rs9 lakh.
- Public Provident Fund: Public Provident Funds are backed by the government and provides tax efficient returns. It is available at almost all post offices and banks. With an investment of only Rs5,000 per month at 7.8% interest, you can receive Rs16.7 lakh after 15 years. It is suitable for investors who want to avoid risk, save for long-term goals like child’s education and marriage without worrying about any capital loss.
- Sukanya Samriddhi Yojna: You can invest in Government-backed Sukanya Samriddhi Yojna under which a Sukanya Samriddhi Account is opened for you. With an investment of only Rs5,000 per month at 8.3% interest for 15 years, you are provided with Rs28.1 lakh after completion of 21 years. You can open your account in most of the post offices and banks. Investing in this scheme is suitable for risk-averse investors who want to save for the long term. There is no risk of capital loss whatsoever, and you can save effectively for your child’s education or marriage.
Mr. Apoorva Tiwari is the Chief Operating Officer at IIFL Holdings and focuses on strategy and transformation. He has been with the group since 2016. Apoorva is currently aligned with the Retail Broking division in order to bring their FY2020 vision to life. He takes special interest in improving customer experience across the division using a combination of process design and new technologies.Apoorva is an alumnus of IIM Ahmedabad and brings with him a professional experience of over 15 years and has worked with global financial services companies like Morgan Stanley and Deutsche Bank.
Ask an Expert
What are tax saving investments?
In order to incentivise savings and investments, the government permits tax exemptions/deductions upon investing in certain areas. This is a popular means of saving tax and build wealth at the same time.
How can I save tax on my investments?
Certain sections in the Income Tax Act provide tax deductions upon investing in specific financial instruments such as mutual funds, Provident Funds, life insurance, notified securities, National Pension Scheme or any health insurance policy. If you invest in these schemes, you are entitled to a deduction, which will lower your taxable income.
How much tax can I save if I invest in mutual funds, provident funds or an insurance policy?
If you invest in any of the above-mentioned assets, you are entitled to a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. An investment of Rs1.5 lakh can help you save tax from anywhere between Rs7,500 (for individuals in 5% tax slab) up to Rs45,000 (for individuals in 30% tax slab).
What is National Pension System? Can I save tax if I invest in NPS?
National Pension System was launched by the government to provide regular income post requirement to Indian citizens. You can open an account under NPS with a minimum annual investment of Rs6,000. If you invest in the NPS, you are eligible for a deduction under Section 80CCD of the Income Tax Act. For an investment of Rs50,000, you can save tax up to Rs15,000 (for individuals in 30% tax slab).
Am I entitled to get a tax deduction if I invest in health insurance policies?
Although the primary goal of having a health insurance policy is financial security during illness, you are entitled to get a tax deduction Under Section 80D of the Income Tax Act. For example, if you invest Rs50,000, you can save tax up to Rs15,000 (for individuals in 30% tax slab).
What is Equity Linked Savings Scheme?
Equity Linked Savings Scheme (ELSS) is a mutual fund plan that invests in shares and stocks with a minimum lock-in period ofthree years. It is considered as one of the best investment options giving a high return of up to 19.6% as compared to the 8.6% of Public Provident Fund, 8.4% of National Savings Ssystem, 8.4% of Bank Fixed Deposit and 8.7% of Employee Provident fund. It also has the lowest lock-in period when compared to other tax-saving investments.
Is it a good idea to invest in ELSS through SIP?
SIP (Systematic Investment Plan) in ELSS is a great way to regularly invest your money to reap good retruns. For example, a monthly SIP of Rs5,000 over a 10 year period, would yield you Rs44.5 lakh even though your total investment was just Rs9 lakh. The power of compounding help you to get higher retruns.
Which is the safest tax saving investment avenue I can invest in?
Public Provident Fund is one of the safest investment avenues for tax-saving as it is backed by the government and also provides tax efficient returns. It is available in banks as well as post offices. Although it demands a commitment of 15 years, you can earn a hefty amount of Rs16.7 lakh at an interest rate of 7.9% by investing only Rs5,000 per month.