The best ways to save tax smartly
It is that time of year again, when we have to make tax saving investments. But how do we go about choosing the right tax saving instruments that will give you the optimal returns while saving you tax?
So here is how to go about making an ideal tax saving portfolio.
Public Provident Fund
This is the best investment you will ever make. It offers you safety, while providing high returns. Make the most of it as both principal as well as interest withdrawals are tax-free at least till the next Budget.
You can invest up to Rs 70,000 and earn an interest at 8% per annum as of now.
Next on your list should be life insurance. For this, first calculate your actual insurance needs and find out if your current insurance cover meets this need.
If not, you need to go and purchase appropriate cover. If you are willing to take a bit of risk, opt for ULIP. But if you want to save money while enjoying insurance and tax benefits, then opt for simple term insurance.
Pension funds
How about saving for retirement while simultaneously enjoying tax benefits? Then how about investing in pension funds?
You can opt for pension funds offered by both insurance companies as well as mutual funds. However be warned that while you don't pay tax on investing, you will have to pay tax on the pension.
Superannuation fund
If you are working for an employer that offers you a superannuation fund, be sure to join it. The investment amount is normally deducted from your salary.
However the tax benefit is applicable only to the recognised funds.
NSC and bank fixed deposits
As we said before PPF is the best investment in terms of safety and returns. However, its main drawback is that the investment has a lock-in of 15 years. Moreover you must keep on contributing to PPF every year.
If you are not happy with these disadvantages, then you can opt for NSC (National Savings Certificate) and Bank FDs. Bank FDs have a lock-in period of 5 years and the minimum deposit amount varies from bank to bank.
NSCs are available at local post office and have an interest rate of 8%. The minimum amount that you can start investing from is Rs 100. The lock-in period is 6 years. However, the drawback is that if you withdraw the investment amount before maturity, you end up paying penalty.
Equity-Linked Savings Schemes
Ready to take on more risks to earn a higher return while also saving on tax? Then ELSS is a must for you.
The minimum investment amount here is Rs. 500 and has a lock-in period of 3 years.
However, it is important to note that if you try to withdraw your investment after three years, you may not get your original amount back, since these funds are purely market-linked and their fortunes are linked to the performance of the markets.
Other tax savings instruments
Do you have a home loan? Are you paying your children's fees? If yes, then the principal repayment of your home loan and your children's fees do help you save tax.