12% Return with tax exemption:Â Tax experts say that among the tax saving options included under Section 80C of the Income Tax Act, ‘Equity Linked Savings Scheme’ (ELSS) is a much better option.
ELSS Tax Saving Scheme: As the month of March approaches, taxpayers often start looking for different options to save tax, but along with different options, it is also important 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 the Income Tax Act, ‘Equity Linked Saving Scheme’ (ELSS) is a much better option.
Savings on 80C, 80D, 80CCD
Tax experts also say that to reduce the tax burden, a person should save Rs 1.5 lakh under section 80C and also take advantage of 80D (health insurance) and NPS under section 80CCD. Additional tax exemption can be claimed on contribution of Rs 50,000 in the National Pension System (NPS).
Experts liked the ELSS scheme
When asked about the best option among various tax saving schemes like NPS, ELSS, National Savings Certificate (NSC) and Life Insurance Policy (LIC), Chintak Shah, Vice Chairman, Anand Rathi Wealth Ltd said, “If it comes to claiming tax benefits under Section 80C of the Income Tax Act, my choice is Equity Linked Savings Scheme (ELSS).”
Annual return of 11-12%!
Shah said, “There are two main reasons for this… First, ELSS investment is directly linked to the stock markets and has historically given long-term returns of around 11 to 12 per cent annually. Second, the ‘lock in period’ under ELSS is only three years. That is, you can withdraw your amount after three years.”
He said that this facility allows investors to withdraw their investment amount for consumption needs or reinvest it in a new ELSS to avail benefits under Section 80C. Thus, this combination of wealth creation potential and tax efficiency makes ELSS an attractive option.
How to choose an investment option?
In this regard, Vivek Jalan, partner at consultancy firm Tax Connect Advisory Services LLP, said, “The choice of investment option depends on the individual’s risk-taking capacity, need and goal. While the interest on products like NSP, PPF is fixed and the government announces it every three months, the returns on products like ELSS are not fixed and their performance depends on the market conditions.”
What options are included in 80C
It is worth mentioning that the investment and savings products under 80C include ELSS, PPF (Public Provident Fund), 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. Under Sukanya Samriddhi Yojana, the lock-in period is till the girl child turns 18 years old and for LIC, it is till the maturity period.
If we talk about interest and returns, it is currently 7.1 percent on PPF and 7.70 percent on NSC. For Sukanya Samriddhi Yojana it is 8.2 percent and in case of LIC it is around five to six percent.
Claim of 50 thousand discount on NPS
When asked about 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, it lacks complete liquidity i.e. cash. Therefore, individuals should evaluate this option carefully before adopting it.
Extra Tax Saving on NPS
Regarding this, Jalan said, “Investing in NPS helps a person to save additional tax up to Rs 50,000. It is one of the major tax saving schemes for taxpayers, employees and self-employed people under the new and old tax system.”
He said that there is a facility of partial withdrawal from NPS which depends on the prescribed circumstances and criteria. Also, the amount withdrawn is eligible for tax exemption if it is up to 25 percent of the self-contribution. Apart from this, tax exemption is also available on lump sum withdrawal of 60 percent of the accumulated NPS fund on reaching 60 years or retirement. Pension products have to be purchased from the remaining 40 percent amount.
If we talk about returns, then according to the Pension Fund Regulatory and Development Authority (PFRDA), investment in equity under NPS has given a return of more than 12% since inception.
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.
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