How to Make the Most Out of Tax Saving Investment


There are many individuals who are new to tax planning and feel that it isn’t important to take tax planning seriously. However, the amount that gets deducted as tax may seem miniscule in the beginning but as your gross taxable income increases, so will the tax paying amount. Why do you want to give your money to the government when you work hard every day to earn it? Tax planning and financial planning go hand in hand, this is why it is essential to plan your tax investments beforehand. Do not wait till the end of the financial year to submit your tax investment proofs because you do not want to invest in a tax saving instrument without understanding its true potential.

There are multiple tax saving schemes that come under Section 80C of the Indian Income Tax Act, 1961 which might seem like a lucrative investment option to help you with your tax woes. Equity Linked Savings Scheme(ELSS) is an open ended mutual fund scheme that comes with a compulsory lock-in period and tax benefit. If you want to save tax, carry a moderately high risk appetite and seek capital appreciation over the long term you can consider investing in ELSS.

Here’s an example to help you understand how ELSS works:

SohamKulkarni, a senior software engineer earns Rs. 12.5 lakhs per annum. This makes him fall under the 30 per cent tax slab. Soham learns about ELSS and decides to invest in this tax saving scheme. According to Section 80C of the Indian Income Tax Act, 1961 you can invest Rs. 1.5 lakhs per fiscal in an ELSS scheme and claim tax deductions for the same. By investing in ELSS Soham has brought down his tax liability and he will now be taxed Rs. 11 lakhs only.

How to make the most out of ELSS?

Follow these simple tips to make the most out of your ELSS investments:

Start early: Those who are new to tax planning believe that it is better to wait for the market to perform better so that they can invest in ELSS. However, seasoned investors know that there is no right time to invest in ELSS and the early you start investing the better it is. Timing the market is almost impossible even, and one must invest in a tax saver fund as soon as possible.

Track your investments: Investors must track their investments every 6 months to determine if the ELSS fund is performing to its full potential. By doing so, investors might be able to determine whether the fund has the potential to outperform its underlying index. Keeping a close tab on your investments might also help investors in deciding whether they need to review / stop or continue investing. ELSS investments come with a predetermined lock in period of 3 years and investments cannot be withdrawn before the lock in period.

Invest as soon as the new fiscal year starts: Making a lumpsum investment in a tax saving scheme like ELSSmay not be a feasible investment choice. If you want to make sure that you continue investing for three straight years without any loopholes, then you need to start a SIP in ELSS fund. Systematic Investment Plan or SIP is a systematic approach where investors can decide when and how much amount to direct towards their investment. All investors need to do is inform their bank, and every month, a fixed amount will be deducted from their account and directed towards their ELSS investment on a predetermined date. But if they fail to give their investment a systematic approach and they invest at the last minute, they might not be able to make the most out of the ELSS fund and also miss out on rupee cost averaging. Investors can also refer to a free online tool like SIP calculator to calculate the capital gains they might earn at the end of their three year investment journey in ELSS.

ELSS is a high risk investment scheme and hence it is better to consult a financial advisor before investing.

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