10 GOOD WAYS TO AND NOT SO GOOD WAYS TO SAVE TAX
The New Year 2022 has begun on a good note for investors. Equity markets are upbeat and small savings rates have not been changed. But taxpayers who are yet to complete their tax planning for the year are dogged by dilemmas. Equity Linked Saving Schemes (ELSS) have done well, but the market is looking jittery. National Pension Scheme (NPS) offers exclusive tax benefits, but the lock-in extends till retirement. Public Provident Fund is safe but its lock-in period is also quite long. Tax-saving fixed deposits and National Savings Certificates have shorter lock-in periods but post-tax returns are very low. Ulips offer tax-free income, but you are stuck with the same insurer for the entire tenure.
To resolve these dilemmas, we assessed 10 tax-saving instruments on eight key parameters —returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income. How these 10 tax-saving options scored on these parameters determined their place in the ranking.
The ranking is largely unchanged for the past 2-3 years. ELSS funds are still at No. 1 position, followed closely by the NPS and small saving schemes. Though the tax net has ensnared many investment options, the tax-free Ulips continue to score low due to their inflexibility. And traditional life insurance policies remain the worst way to save tax. Read on for more.
ELSS Funds
Returns: 16.5% in the past five years
Should you invest? Equity markets are looking precarious and many analysts believe a correction is round the corner. Also, long-term capital gains beyond Rs 1 lakh from equity funds are now taxable. Yet, ELSS funds have topped the list of best tax savers this year as well. That's because these score handsomely on other parameters. These have the potential to give high returns, there is transparency about where they invest and the costs are very low. Besides, the lock-in period is very short and investors have the flexibility to stop if they want to.
While these are the positive aspects, ELSS funds can be risky due to the volatility in the stock markets. Volatility suits long-term investors who take the SIP route. But the SIP window has closed for taxpayers who have to show proof of Sec 80C tax-saving investments in a few days. So, our advice is not to put a large sum into ELSS funds at one go but stagger the purchases over 2-3 tranches before the 31 March deadline.
How to invest? Investing in ELSS is very easy if you are already KYC compliant. It can be done online in a matter of minutes directly through a fund house or an investing portal. Keep in mind that some ELSS funds allocate more to small- and mid-cap stocks, while others stick with stable large-cap stocks. Choose a fund that suits your risk profile.
Read detailed analysis about NPS, Ulips, PPF, Senior Citizens' Saving Scheme, Sukanya Yojana, pension plans, NSCs, tax-saving FDs and more here
FUNNY MONEY
By Sunil Agarwal & Ajit Ninan
Brig Narinder Dhand,
Founder & Convener
Veteran's Web Portals.
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