Why pay all your hard earned money in taxes? Wouldn’t it be nice if you earn tax free income? There are ways to earn tax free income, if you make these investments.
The money you earn doesn’t count. What you save in tax does. This is why you must calculate tax efficiency of your investments. (This is nothing but after tax return on investment).
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1. Invest in PPF
PPF is a great investment for conservative investors. PPF offers 7.9% a year (This is as of August 2019). PPF offers higher return than FDs which give just 6.5-7% a year after taxes.
What’s special about PPF is the tax benefit. PPF enjoys EEE benefit. The money you invest in PPF enjoys a tax deduction up to Rs 1.5 Lakh a year under Section 80C. The interest and money withdrawn at maturity are tax free. PPF has a lock-in of 15 years. You can even take a loan against PPF.
If you invest Rs 1.5 Lakh a year in PPF for 15 years; you get nearly Rs 44 Lakhs on maturity. (Assume interest rate of 7.9% a year).
Salaried employees make a contribution towards the EPF scheme. The employer makes an equal contribution towards your EPF scheme. The EPF scheme is managed by the EPFO. You have EPF interest rate of 8.65% for 2018-19.
EPF offers EEE benefit. The money you invest in EPF enjoys a tax deduction up to Rs 1.5 Lakh a year under Section 80C. The interest and money withdrawn at maturity are tax free. You can easily save tax by investing in EPF. This is one of the best ways of investing money.
Equity Linked Saving Scheme or ELSS is a tax saving equity mutual fund. ELSS enjoys Section 80C tax benefits.
If you fall in the highest income tax slab, ELSS helps save Rs 46,800 a year in tax.
See Also: Income Tax Saving Tips
ELSS invests most of the money in stocks. This is high return at high risk. However some ELSS schemes have offered returns as high as 12-15% a year. This is 2x higher return than FD or PPF. The Rs 1.5 Lakh investment in ELSS can double in 5 years. ELSS schemes are taxed at 10% without indexation benefits; if returns exceed Rs 1 Lakh in a financial year.
Ramesh earns a salary of Rs 11 Lakh a year. He invested Rs 1.5 Lakh in ELSS. You have 30% of Rs 1.5 Lakh as Rs 45,000. Then a cess of 4% on income tax of Rs 45,000. This translates to Rs 1,800. Ramesh saved Rs 46,800 a year in tax, by investing in ELSS.
Tax free bonds are issued by Government Enterprises. They offer a fixed interest rate and are a low risk investment. Invest in tax free bonds where you earn interest as fixed annual income. Celebrities like Amir Khan, HNIs and NRIs have invested in tax free bonds.
See Also: The Best Tax Saving Scheme
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