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Tata Capital > Blog > Wealth Services > 5 Ways to Minimize your Taxes and Maximize Investments

Wealth Services

5 Ways to Minimize your Taxes and Maximize Investments

5 Ways to Minimize your Taxes and Maximize Investments

We spend first quarter of the year trying to understand ways to save taxes. Most financial advisors with a forward-looking mind-set, would advise you to map tax-minimizing options while maximizing your investment options. In this blog, we share how to ear invest your money in the right tax saving options, so that your money helps you earn more money, thereby lowering your tax burden

Here are 5 smart tax saving options for you to invest in:

Equity-linked Savings Schemes (ELSS)

This financial instrument allows you to invest in diversified mutual funds with a tax benefit under Section 80C of the Income Tax Act. You can avail a benefit by investing up to Rs. 1.5 lakhs. However, the scheme also comes with a minimum lock-in period of 3 years. One important thing to remember is that the dividend to the investor is not on the basis of company profits but is rather based on the NAV (Net Asset Value). It is estimated by dividing all the assets and removing all the liabilities.

One word of caution, starting last financial year, you will have to pay 10% tax on dividends earned through Mutual funds, which are known as dividend distribution tax on earnings. Although, there are no assured returns, generally the rule of thumb is that if you invest in long-term mutual funds, you do end up making profits.

Public Provident Fund

PPF or Public Provident Fund has been a safe bet for plenty of financial investors ever since it was introduced fifty years ago in 1968. What makes it so reliable is the fact you get assured returns on the principal as well that interest amount. PPF offers 8 percent interest per annum, which gets revised every 3 months. There is a lock-in period of 15 years, which means you can expect good long-term investment returns.

Another positive aspect of PPF is that, you can open your account by depositing a minimum amount ofRs.500 to a maximum cap of Rs. 1.5 lakhs a year. You can open your account easily by visiting your nearest post office or bank branch. These days a few banks are even offering PPF online. It’s perfect for long-term players who want to invest and forget about the constant volatility of the equity markets. Though, we’d recommend a small chunk in the equity market for higher returns and investments.

Employees Provident Fund     

With a large chunk of the workforce being salaried in India, this is a perfect investment option for all employees. How does it work? Basically, 12 per cent of the employee’s salary is deducted every month for an EPF account, which is equally shared by the employer. At the end of the employment term, the employee can withdraw this amount with interest by intimating the employer.

As an employee, you can enjoy a tax benefit of up to Rs. 1.5 lakhs per year. The latest interest rate on EPF amounts to 8.55% for the financial year 2017-18. There is another type of investment option called VPF, which is the Voluntary Provident Fund, wherein an employee can increase his own contribution up to 100 percent of the basic salary and Dearness Allowance (DA). 

Unit Linked Investment Plans

While some people prefer savings, others favour investing in insurance for protecting themselves and their loved ones for any contingency, emergency or death in the family. Unit Linked Investment Option is a great combination of protection and savings for the future. In a ULIP plan, a part of your investment is spent in various long-term market assets and instruments while the other part is used for insurance.

That’s why the lock-in period for most ULIP investment plans is usually 5 years or more. The duration for ULIP usually lasts 15 to 20 years after which an investor can expect decent returns depending on the growth of the equity market. 

Word of caution

This type of investment is not recommended for those who are looking strictly at insurance. That’s because it involves certain market risks linked to equities and other instruments.

Which brings us to the last point - Insurance Plans

Unlike traditional insurance plans, there are now several types of investment plans like an endowment, money-back and life-long insurance plans. which offer various types of returns to the investor. All these come with a savings element based on a fixed term or amount at end of the term. The premiums for these investment plans are based on the age, period of the insurance plan and the life insurance coverage of the plan. One great advantage of these insurance plans is that premiums are covered for a benefit under Section 80C. Plus, the maturity or the death benefit is completely tax-free.

The bottom line

So, when you are filing your taxes this year, make sure to choose between these 5 great tax-saving investment options and invest smartly.

Tata Capital helps you in making the most of your investment options, while having a tax-efficient portfolio, click here to know more.