Tax-Saving In The Eleventh Hour
Business Today|March 07, 2021
Planning last-minute investments to save taxes? Here’s what all you can do
Avneet Kaur

With the current financial year nearing its close, it’s time to take stock of your tax-saving investments. In case you opt for the old tax regime, you can claim deductions of up to ₹1.5 lakh in a financial year under Section 80C. There are other sections also to help you reduce your tax outgo. Do your tax planning activity at the beginning of the financial year to avoid last-minute hiccups. But in case you are late, there’s still time to invest and save taxes. A look at the options available for last-minute investors.

Section 80C: The Most Popular

You can avail a deduction of up to ₹1.50 lakh in a financial year under Section 80C of the Income-Tax Act. A number of options are available but choose the one that suits your risk profile the best. Think long-term and do not take decisions on an ad-hoc basis.

Tax-saving mutual funds: Most financial planners swear by tax-saving mutual funds, or ELSS. An ELSS is an open-ended equity-linked scheme with a statutory lock-in period of three years and tax benefits. ELSS funds have the shortest lock-in period among tax-saving options available under Section 80C. “In the tax-saving space, ELSS is one of the preferred investment vehicles as it has one of the lowest lock-in periods and offers the maximum potential for returns. For the long-term, equity is the most-suited investment option as volatility is reduced substantially. Given the growth environment around us, it is preferable to remain invested in equities,” says Raghvendra Nath, Managing Director, Ladderup Wealth Management.

In the last one year, ELSS funds have delivered an average return of 22.30 per cent, the highest among tax-saving options. The best-performer among them (irrespective of asset size) has been Quant Tax Fund with 55.52 per cent return in the last one year. In the last three and five years, ELSS funds have given average returns of 8.98 per cent and 14.31 per cent, respectively.

Mutual fund advisers, however, advise caution. The market remained volatile in 2020, which benefitted these schemes. “Expected returns from these schemes should be 12 -14 per cent per annum,” says Nath.

Also, no gain is without risks. If you are a risk-averse investor, don’t go for ELSS funds. They are for those who have high-risk appetite and can stay invested for at least five-seven years.

Capital gains on tax-saving MFs attract 10 per cent tax on gains exceeding ₹1 lakh in a financial year.

National Pension System: Another tax-saving instrument, which allows equity allocation, is the National Pension System (NPS). The government launched this low-cost tax-saving option to help investors save for retirement. NPS restricts withdrawals till the age of 60 in Tier-I accounts. Premature withdrawals are allowed after three years in specific cases like critical illness, children's education, wedding expenses, purchasing or building a house.

NPS offers three kinds of deductions for investing in Tier-I accounts. Firstly, any individual who is a subscriber of NPS can claim tax benefit under Section 80 CCD (1) within the overall cap of ₹1.5 lakh under Section 80 CCE. Secondly, NPS allows a deduction for investments up to ₹50,000 under subsection 80CCD (1B). This is over and above the deduction of ₹1.5 lakh available under Section 80C of the I-T Act. Thirdly, a corporate subscriber may avail a deduction of up to 10 per cent of salary (basic + DA) on employer’s contribution under Section 80CCD (2).

NPS also offers a voluntary account, Tier-II, with flexible withdrawal and exit rules. Last year, the government allowed NPS subscribers working with the Central government to avail tax benefit on their contribution to Tier-II accounts as well. Such contributions are locked in for three years.

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