Thursday, February 1, 2018

VittVishesh on Quora: What are some of best income tax saving schemes/ideas/plans in India?

What are some of best income tax saving schemes/ideas/plans in India? Response:-

  1. Equity Link Saving Schemes (ELSS) are best instruments for tax saving.
  2. Term insurance is another must have financial product which is covered under 80C
  3. Medical insurance for self, spouse and parents are eligible for deduction (This is outside 80C)
  4. If you do not want to risk your money, PPF is meant for you. But, you must consider the effect of ‘inflation’ on your savings. PPF interest will be exempt at the time of withdrawal.
  5. NPS is a good product; but one must do strategic evaluation of opportunity cost involved before getting into this long term commitment. NPS provides another Rs. 50000 investment for tax saving beyond section 80C but your money will be locked till your retirement. NPS corpus will be partially tax exempt at the time of withdrawal and certain amount must be invested into annuity plans.
  6. One must ignore ULIPs and endowment insurance plans.
  7. In my view, one must not consider Bank FD and NSC for tax planning. Since, interest income is fully taxable.
Mutual funds or AMCs manages ELSS schemes. ELSS are primarily equity mutual funds but with a lock in of 3 years from the date of investment. If you are investing through SIP route every subsequent investment will be available for redemption after 3 years.
Mutual funds are available in regular and direct plans. Direct plans have advantage of distributor’s commission paid to you in form of higher NAV. With power of compounding the 1% difference can add up to a big amount.
This is a good news for Indian investors that distributors are now also offering direct plans through their portals. This is a fin tech revolution evolving. Distributors like Zerodha and paisa bazaar are already into this. With Zerodha one can invest into direct equities and direct mutual funds through same credentials. It is speculated that in future PayTM could also be ventured for direct mutual funds.

If you invest regularly into ELSS for forever (like 5 years or more) and you have selected dividend payout option, you will have a steady passive income in form of dividends. Unlike non tax saving mutual funds, ELSS are consistent in dividend payouts. The ELSS I am invested into gives me an annual dividend of 10%. Hence, 10th year onwards my dividends could take care of my 80C obligations

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