Why do you invest hard earned money? Is it not for good returns? What if I tell you that tax is eating up a part of your returns? Would you not be disappointed? This is exactly what will happen if you don't do tax planning. There are some investments which give tax-free returns and the returns from some of your investments are taxed.
Tax evasion is a crime. Tax avoidance is not. Why not study some of the investments and get an idea on their returns after tax?
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This is tax season. You and your friends are busy submitting proof of investments to the accounts department, to save tax. It is the duty of your employer to withhold taxes (cut taxes from your salary), and pay it to the Government on your behalf.
The accounts department has been computing taxes on your salary, based on the proposed investment declaration, which you had submitted at the beginning of the financial year.
So which tax investment suits you?
Equities have done very well in the past year. Frankly speaking, equities have given a terrific performance. This brings out the question, Is investing in ELSS a good idea? ELSS is a type of equity diversified mutual fund, which invests most of your money in equities. It has a compulsory lock-in of 3 years.
Remember: ELSS invests most of your money in equities. This means high returns but at high risk. If you are risk-averse, then do not invest in ELSS.
So what's special about ELSS? ELSS enjoys the EEE benefit. The investment you make in ELSS will be tax exempt up to Rs 1.5 Lakhs a year under Section 80C. The returns and the money you get at withdrawal are tax-free.
Remember: If you like to take risk in investment, ELSS is a great option. Your returns are tax free. The compulsory lock-in, forces you to stay invested for at least 3 years, giving you an excellent opportunity to get high returns. This is because you need to stay invested in equities for at least 3 years, to see high returns. Invest in ELSS via SIPs and avoid lump sum investments in ELSS.
The last few months have thrown up an interesting debate. Are investments in fixed deposits better than the public provident fund popularly called PPF? This is a fight between two financial products, which are both considered suitable for risk-averse investors. After demonetization, banks were flush with cash and cut FD rates. RBI asked banks to reduce loan rates and transfer the benefits of repo rate cuts, to you and other borrowers.
Banks responded saying, to transmit benefits of lower interest on loans to borrowers, they had to further reduce FD rates. This would cause investors to leave fixed deposits and invest in small saving schemes like PPF, NSC, Senior Citizen Scheme and so on.
The Government responded by slashing small saving scheme rates and for the Jan-March 2018 quarter, PPF is offering 7.6% from over 8% in the past.
This bears the question, Is PPF a better investment than fixed deposits? FD gives an average interest of around 7% a year. Interest is added to your taxable salary and you are taxed, as per your tax bracket. Your return after taxation is just around 5-6%. This is much lesser than the 7.6% enjoyed by PPF.
Remember: PPF enjoys the EEE benefit. It is an excellent investment for risk-averse investors. Your investment is tax exempt up to Rs 1.5 Lakhs a year under Section 80C. The interest and the amount withdrawn at maturity is tax-free. This makes PPF a better tax saving investment than Fixed Deposits as it gives higher returns after taxes.
You have learnt something very important. Just a good return on investment is not enough. The returns must also be tax-free. Be Wise, Get Rich.
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