How to Save Income Tax: Be it salaried class or non-salaried class, in the month of March, everyone is worried about such investment options in which they can get maximum tax exemption on investing.
Income Tax Saving: As the month of March approaches, taxpayers often start looking for tax saving options. But with all the options, it is also important for you to know which tax saving scheme is better in terms of returns and providing immediate cash when needed. Tax experts say that among the tax saving options included under section 80C of Income Tax, ELSS is a much better option. Experts also say that to reduce the tax burden, apart from saving Rs 1.5 lakh under section 80C, one should also take advantage of 80D (health insurance) and NPS under 80CCD.
Long term return of around 11 to 12 percent per annum
You can claim additional tax exemption on investment of Rs 50,000 in National Pension System (NPS). When asked about the better option among the various tax saving schemes like NPS, ELSS, National Savings Certificate (NSC) and LIC, Chintak Shah, Vice President, Anand Rathi Wealth Limited said, “If it comes to claiming tax benefit under 80C, then my choice is ELSS.” Shah said, “There are two main reasons for this… First, ELSS investment is directly linked to the stock market and it has historically given a long term return of around 11 to 12 percent per annum. Second, the ‘lock in period’ under ELSS is only three years. That means you can withdraw your money after three years.
ELSS returns depend on market conditions
He said, ‘This facility allows investors to withdraw their investments for consumption needs or reinvest in new ELSS to avail benefits under 80C. Thus, this combination of wealth creation and tax efficiency potential makes ELSS an attractive option.’ Regarding this, Vivek Jalan, partner at consulting company Tax Connect Advisory Services LLP, said, ‘The choice of investment option depends on the person’s risk-taking ability, need and target. While the interest on products like NSC, PPF is fixed and the government announces it every three months, the return on ELSS is not fixed and their performance depends on the market conditions.’
How much interest and how much lock-in on which investment?
It is worth noting that investments under 80C include ELSS, PPF, Sukanya Samriddhi Yojana, NSC, Life Insurance etc. NPS comes under Section 80CCD. The lock-in period of PPF is 15 years, while the lock-in period of NSC is five years. On the other hand, the lock-in period under Sukanya Samriddhi is till the girl turns 18 years old and LIC till maturity. If we talk about interest and returns, the rate on PPF is currently 7.1 percent and on NSC it is 7.70 percent. For Sukanya Samriddhi Yojana it is 8.2 percent and in case of LIC it is around five to six percent.
You can contribute an additional Rs 50,000 to NPS
Regarding other tax saving measures apart from section 80C, Shah said, “Taxpayers can claim additional tax exemption by contributing Rs 50,000 to NPS under section 80CCD (1B). This will further reduce their taxable income.” He also said that since the investment in NPS is for a long period, there is a lack of liquidity in it. Therefore, people should evaluate this option carefully before adopting it. Regarding this, Jalan said, “Investing in NPS helps a person save additional tax of up to Rs 50,000. It is one of the major savings schemes for taxpayers, employees and self-employed people under the new and old tax regime.”
He said that there is a facility of partial withdrawal from NPS which depends on the prescribed conditions and criteria. Also, the amount withdrawn is eligible for tax exemption if it is up to 25 percent of self-contribution. Apart from this, tax exemption is also available on lump sum withdrawal of 60 percent of the collected NPS fund on reaching 60 years or retirement. Pension product has to be purchased from the remaining 40 percent amount. If we talk about returns, then according to PFRDA, investment in equity under NPS has given a return of more than 12 percent from the beginning till now.
On the other hand, NPS has given returns up to 9.4 percent in the case of government employees. Responding to a question, Shah said that it is important to ensure that the taxpayer makes full use of all eligible deductions. For those who chose the old tax system, this includes maximum deduction under section 80C and 80D (health insurance and precautionary health care). Apart from this, taxpayers can also claim losses incurred due to the recent decline in the capital market in their returns. This can help them reduce tax liability on other capital gains.
