Choose tax saver scheme based on pros and cons

If you are fortunate enough to earn a sum that puts you in a higher tax slab, you probably dread the tax part of it. So do a hundred others. While we grew up swotting Pythagoras theory and Panipat war history, money management skills featured nowhere for most of us. Indian income tax laws allow us a series of tax-saving provisions and Section 80C is the most prominent one, especially for salaried people.

Your tax saving investments become more meaningful when you not only save maximum taxes possible (up to Rs 46,800) from them but also earn the maximum possible corpus once your investment matures. Here, let us explore how to choose the best tax-saver scheme.

ELSS and other tax-saving plans

ELSS or Equity-Linked Savings Scheme is the only tax-saving mutual fund. Only selected mutual funds qualify as per the SEBI and government guidelines. You can claim the amount you invest in such a scheme for the annual tax deduction.

There is no upper cap on the amount you can invest, however, tax benefits are available for the investment made up to Rs 1.5 lakh, as per section 80C of the income tax act.

Now there are other investments that qualify for 80C deduction just like ELSS – Tax-saving FD, Public Provident Fund, National Pension Scheme, ULIP and Employees Provident Fund are some of them. Some people choose one investment avenue while some choose a combination of these. However, ELSS comes with a host of attractive features that no other scheme has.

What makes ELSS stand out among other 80C investments

Potential for supreme returns

Tax-saver mutual fund is the only feasible investment that allows you to explore the potential of equities. Of course, NPS and ULIPs also offer benefits of equities.

However, they both are long-term (10 plus years) plans aimed to build a retirement corpus rather than savings. And their equity exposure is limited at best. ELSS combines the power of compounding on equity returns and has systematically delivered better returns.

Shortest lock-in period

Every tax-saving investment except ELSS has a lock-in period that ranges from five years to 15 years. ELSS has only a 3-year lock-in. Historically, investors have
received higher returns compared to other schemes even in this tenure.

However, experts recommend that you stay invested for at least five years to reap maximum benefits out of the scheme.

Ideal for those paying the lowest and highest taxes

If you have just started working with a huge investment horizon ahead of you, ELSS can be your first step to the world of equity shares and mutual funds. If you find it difficult to invest a lump sum (as you haven’t been working for long), you can invest through monthly SIPs.

And if you belong to the 30% tax bracket, you save Rs 46,800 every year! Besides being on the path of wealth creation in the longer term.

It is important to plan ahead and choose the best ELSS. Last minute fund selection can result in making a hasty and poor choice.

Choose some handpicked and best performing funds based on your investment profile that maximise your savings and minimise your tax outgo.

(The writer is Founder and CEO of ClearTax)