How to Get Tax Free Income?

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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How to Save Tax By investing?

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 The interest and money withdrawn at maturity are tax free.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).

See Also: Saving Tax through Mutual Fund Investments

2. Invest in EPF Scheme

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 The interest and money withdrawn at maturity are tax free.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.

3. ELSS Tax Benefits and Investment Returns

Equity Linked Saving Scheme or ELSS is a tax saving equity mutual fund. ELSS enjoys Section 80C tax benefits.

• ELSS has a lock in period of 3 years.
• Invest just Rs 500 a month through SIP. (This is a method of investing in mutual funds).
• Dividend option available.
• Instant investment proof.

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.

How Ramesh saved Rs 46,500 with ELSS?

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.

4. Invest in Tax Free Bonds

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.

Popular Tax Free Bonds:

• Indian Railways Finance Corporation N1 Series
• HUDCO N2 Bonds
• REC N7 series
• HUDCO N3 Bonds
• National Highways Authority Of India
• REC N6 Bonds
• Indian Railways N7 Series
• HUDCO N3 Bonds

See Also: The Best Tax Saving Scheme

Features of Tax Free Bonds:

• Tax Exemption: The interest income on tax free bonds is free of income tax. Suitable for those in the higher tax bracket. No TDS.
• Interest: Bonds offer interest annually. Some bonds offer interest of around 8%.
• Risk: Highly secure. Offer capital protection and fixed annual income.
• Lock-in: The lock-in ranges from 10 to 20 years. Cannot withdraw till maturity.
• Returns: Returns depend on purchase price of tax free bonds.

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