tax saving instruments
How to Save Tax through Investments

by Editor

April 8, 2021

3 minute read

Achieving financial goals becomes easier with tax saving instruments. In fact, as an investor, one must look for options that also generate tax-free income, apart from tax exemptions for investments made. Under Section 80 (C) of the Income Tax Act, you can save up to ₹1.5 lakh per financial year with the help of investments. Reducing the burden is extremely important, since it raises disposable income. This way you have more cash to save or spend, which raises consumption levels.

Subsequently, the sales and earnings of the corporate sector increase, which pushes up the prices of individual stocks. If you have not finalized the products you wish to invest in yet, here’s a guide on the best investments for tax benefits. Applying for most of them can be done online which, saves time and paperwork too.

Liquid Mutual Funds

These are open-ended schemesthat usually invest in short-term assets, such as repos, certificates, deposits, commercial papers and treasury bills. You do not have to pay any tax on the dividend income from these funds. Make sure to analyze the fund size, expense ratio and portfolio diversification to pick the best one for your financial goals. However, you should also know that long-term capital gains are taxed at a rate of 20% at present.

ELSS Funds

This is one of the most popular tax savings funds in India, offering rebate under Section 80 (C) of the Income Tax Act. Investors can save up to ₹1.5 lakhs, along with building significant wealth over time. ELSS are the most effective investments,with potential for high returns, which offers an edge over several other tax saving options. However, remember that since they invest most of their corpus in stocks, the risk is also higher.

Exchange Traded Funds (ETFs)

Along with lower operational costs and transparency, ETFs also allow tax efficiency. This is mainly because of their structural differences with traditional mutual funds. The capital gains tax on this instrument will only be incurred when it is sold off by the investor. However, you must also be aware of the tax situation for dividends. The rate for qualified dividends varies from 5% to 15% depending on your current income. The unqualified ones are taxed as per the income tax slab of investors.

Pension Plans

In the Union Budget for 2021, it was proposed that senior citizens would be exempt from filing tax returns if pension is their sole income source. Section 80 (C) of the Income Tax Act covers multiple retirement plans where deductionsof up to ₹1.5 lakhsare available. Sections 80C, 80CCC and 80CCD have specified the tax respite in detail for investors. This will help you make an informed decision, in sync with your financial goals and current income.

Income tax might seem like a burden. However, as a responsible citizen, one must consider it as a responsibility,rather than a cause of concern.At the same time, since the Indian government has introduced multiple tax saving funds, make the best of the opportunities readily available.

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