Any person earning Income has to pay tax. So why are we waiting for the last-minute rush, tax planning and investing to save taxes should not be left for the last minute. Better to start now, this way one can get ample time to carefully plan your tax which will enable us to achieve our target of Tax saving and also helps to accumulate wealth for our future.
There are various tax savings options available under section 80 C of the Income Tax Act, 1961. Now the next step is to figure out the option which offers the highest possible returns.
Here we are going to discuss few such investments which are good tax-saving instruments and simultaneously helps to create wealth in a long term:
- Equity Linked Saving Scheme (ELSS)
Equity is the best investment option that offers a kind of wealth creation opportunity. It holds the potential to beat inflation and generate long-term wealth. However direct investment in stocks does not offer a tax-saving advantage and it is subject to a highly volatile market that needs lots of expertise to create wealth out of it. That is where Mutual Funds come because one can leverage the power of investing in equity but leave the expertise required for equity investing to the domain experts for small fees.
Equity Linked Saving Scheme (ELSS) is one of the best options in the given scenario. ELSS funds are diversified Equity Mutual Funds. One of the important advantages is it has a mere 3 years Lock-in period which is the lowest among other tax-saving instruments at the same time it gives the highest returns.
ELSS funds primarily invest in Equities and Equity Linked Instruments, across the market in terms of sectors and market cap.
Liquidity is also one of the factors of evaluation, the 3 years lock-in with ELSS funds may be a better option for most investors because your money is far more liquid than in other investments.
Due to 3 years, lock-in period Fund Managers can generate better returns because they can take long term strategic decisions as opposed to short term moves in response to investor behaviour when the market is volatile.
SIP in ELSS:
Another good option is to invest in ELSS via SIP. Here one can invest regularly as per our financial goals and it also benefits from averaging during times of volatility.
One can also gain from the power of compounding, which is one of the next best options in building wealth creation. As per the growth option in ELSS funds you stand to benefit from the power of compounding.
E.g. If we invest Rs.5000/- per month (SIP) for 15 years in ELSS then the total investment was only Rs. 9 lakhs and the returns after 15 years would have been Rs.44.5 lakhs.
- Public Provident Fund (PPF)
When people think of building a corpus for their retirement, the first thing that comes to their mind is by contributing to the Public Provident Fund. Public Provident Fund is one of the safe options of investment as it is backed by the government. It gives a fixed rate of Interest annually (7.1% per annum – at present). However, with the current changes proposed in Union Budget 2021, the interest earned will be taxable if the annual contribution is Rs.2.5 lakhs and above.
It is available in all post offices and all public or private sector banks.
The Frequency to deposit in the PPF account is also as per the tax payer’s requirement ie. One can deposit either a lump-sum amount or in instalments during the Financial Year.
E.g. With an investment of only Rs. 5000 per month at 7.1% per annum one can receive approx. Rs. 16.7 Lakhs after 15 years.
It is suitable for investors who want to avoid risk, save for long term goals like child education, marriage, etc without worrying about any capital loss.
Must Read: Portfolio Management Services in India
- Sukanya Samriddhi Yojana
Sukanya Samriddhi Yojana (SSY) is a small deposit scheme for the girl child launched as a part of the “Beti Bachao Beti Padhao” campaign. One of the reasons why this scheme has become popular is due to its tax benefit. It is again backed by the Government so it is preferred by those taxpayers who want to save tax and get good returns without capital loss.
Though this option is available only to those who have a girl child, it is a good tax-saving instrument that fetches the highest rate of interest (7.6% per annum) and also creates corpus in the long run which enables the taxpayer to achieve their financial goals like girl child marriage or for her study purpose.
A Sukanya Samriddhi Account can be opened any time after the birth of a girl child till she turns 10, where you will have to deposit a minimum of Rs.250/- and a maximum of Rs. 1.5 lakhs can be deposited during the financial year. The account remains operational for 21 years from the time it is opened or until the girl in whose name it is opened gets married, after she turns 18 years.
It comes with exempt-exempt-exempt (EEE) status as its annual deposit qualifies for Sec 80 C benefit and maturity proceeds are also non- taxable. The Interest received is also exempt from Tax.
- National Pension Scheme
As the name suggests National Pension Scheme is dedicated solely to retirement planning. It is a pension cum investment scheme launched by the Government of India for the age from 18 to 65 years. NPS is also a good option for wealth creation as your money gets invested across asset classes like equity, Government/corporate bonds, etc.
Here one can have the choice to select our asset allocation which follows an age-based asset allocation model depending on our risk appetite.
It has the dual benefit of investing for retirement and also the best tax saving instrument as it qualifies for EEE status.
Hence the National Pension Scheme can be a good option for those who are not comfortable making investment decisions on their own then such a tailor-made solution can be the best choice and will also build a corpus for their retirement.
- Fixed Deposit Scheme
Fixed Deposits are one of the safest investment options, especially when one compares them with stocks or other market-linked instruments. As the volatility is low the corpus that one set aside in Fixed Deposits serves as a great way to ensure that your capital is safe.
For the investor who is just starting with different investment options, then investing the same amount as your capital is an easy way to arbitrage your risks and receive an assured amount at maturity.
One can also start saving at an early age and multiply wealth with the power of compounding.
- United Linked Insurance Plan
United Linked Insurance Plan is a combination of savings and protection. Along with providing Life Insurance it also helps to channelize one’s savings into various market-linked assets for meeting long term goals.
A Minimum lock-in of 5 years is long term, which ensures investors generating good market-linked returns.
It is good to stay invested in these schemes for a long-term period of say about 10 years or more. Over the long term, ULIP is expected to generate returns ranging from 10% to 12%. The returns from the best ULIP are better than other market instruments like FD’s, NSC’s, PPF, etc. Best ULIP can also beat inflation in the long term.
One can also get a brisk return by exercising the option of fund switching in ULIP’s due to long term investment.
The amount received on maturity is exempt from taxation u/s 10 D of Income Tax Act, 1961. Along with this tax relief, one can also avail of tax benefits on premiums paid up to a maximum of Rs.1.5 lakhs u/s 80 C of Income Tax Act, 1961.
Thus, the objective of wealth creation over an investment horizon of 10 years can be fulfilled by investing in the best ULIP.
It is wise to think of investing beyond the traditional ways of saving tax like, investing in Fixed income tax saving instruments like FD, PPF, or endowment life insurance plans etc. Plan for other options like ELSS, ULIP, etc based on the risk appetite and other relevant factors as discussed above of an individual.
With many options available when investing for wealth creation and saving tax at the same time can be easily achieved by making the right choice at the right time and getting started with it at the earliest.
The budget brings a bag of amendments along and there begins a never-ending discussion of whether these are good news or not. So like every other year, this year, the Budget introduced some of the peculiar changes in existing Income Tax Laws which will certainly impact your pocket from the start of the coming financial year.
So we decided to sum up everything that could knock your pockets from April 1st, 2021. Hope this article will help everyone looking for amendments affecting or impacting their pockets from April 1st.
Introduction of new wage code
This Budget came with the New-Wage Code which dictates that the basic component in the Salary structure should be at least 50%. Currently, companies have a practice of capping the basic pay around 25-40%, however, with the introduction of the New-Wage Code, Basic Component will be a minimum of 50%.
Implementation of the same may yield interesting results. Capping the basic pay at 50% would mean that other allowances like HRA etc. are capped at 50% altogether. Pay packages will definitely witness a rejig in the salary structure since there are also other rules like PF rules and gratuity which will change with this Budget.
Related Article: Checklist for your Investment portfolio in 2021
1. Provident Fund Rules and Regulations
The Budget has announced certain changes in EPF rules too. Currently, the Employees Provident Fund comes with the tax status of EEE. Contribution to Employee’s Provident Fund as well as the proceeds from the EPF are tax-free.
However, with this budget, contribution above Rs. 2.5 lakhs towards EPF would be covered under Income Tax.
If the employer provides the option of opting for NPS (National Pension Scheme) as an alternative for tax saving over and above the contribution of Rs.2.5 lakhs, then only the employee would be able to save tax.
This rule is also applicable to the Voluntary Provident Fund (VPF). Hence, if the contribution at any time, considering both EPF and VPF exceeds rs. 2.5 lakhs then the excess would be charged to Income tax from now onwards.
2. Pinch to Income Tax Returns Non-filers
Respected Finance Minister Ms. Nirmala Sitharaman made it plenty clear that the Income Tax is widening its scope and coverage. One more hint is the insertion of section 206AB, which basically deals with the highest rate of TDS for non-filers of Income Tax Returns. Additionally, the highest rate of TCS is dictated by section 206CCA.
This move is expected to bring the non-filers also into the Income Tax net. Mass filing of ITR would definitely result in improvement in the transparent process of ITR.
3. Prefilled Income Tax Returns are a reality now
ITR filing for capital gain is very complex and time-consuming especially for shares and mutual fund trading. However, this year brings a welcome change to this set process. Finance Minister has announced the entry of prefilled Income Tax Return w.r.t following
- Income under the head “Capital Gain” from the sale of listed securities.
- Income from dividend
- Interest Income from Bank fixed deposits
- Interest Income from Post Office
This will achieve ease of filing as well as will ensure that no income escapes the taxability.
4. Leave Travel Concession in COVID-19 backdrop
The year 2020 has been harsh to everyone and hence the Respected Finance Minister has announced a change in LTC (Leave Travel Concession) in this year’s Budget.
This year would be in the form of a cash allowance rather than a regular LTC scheme due to the COVID-19 impact.
This scheme will be exercised in the block of 4 years of 2018-2021. LTC was available only on travel expenditure earlier. But in 2021, the employees are allowed to take an exemption of the amount spent on buying the specified goods and services as notified. It is required that the money should have been spent on goods and services through electronic mode and from 12th October 2020 to 31st March 2021. However, this scheme specifies the upper cap on the expenditure as well.
5. Gratuity is Good News after all
Gratuity was previously applicable only if you were onboarded on the payroll of the company. It required that the employees should complete a minimum period of employment before becoming eligible for gratuity payment.
However, with new Gratuity rules, even if the employee works on contract even for a year, then he would be eligible for the gratuity. This change is considered a welcome move.
6. Changes in ULIP contribution
This Budget has brought in the new and much-awaited news from the perspective of the private players in the mutual fund markets. ULIPs were totally exempt and considered under EEE tax status.
However, with these budget amendments, the tax would be levied on capital gains at par with mutual funds, which is at 10% on the amount exceeding Rs.1 lakhs. However, ULIPs are taxable only if the annual premium amount increases by 2.5 lakhs. Due to this amendment, ULIPs no longer would be lucrative as compared to Mutual Funds in tax scenarios.
Important pointers to deal with the changes
- Check if the salary pay package is changing as per the wage code and make necessary changes for maintaining the liquidity position all along.
- Reconsider the Employees Provident Fund and Voluntary Provident Fund contributions so as to mitigate the tax liability brought in by the budget.
- Check with the employer whether LTC claims are entertained and what are the eligible goods and services for which they can be availed.
- If you are a contract employee, ensure that you will at least complete a year to be eligible for gratuity.
- Consider reorganizing the tax investments for availing deductions in line with amendments, especially w.r.t ULIPs, EPF contribution, etc.
- Always ensure to file ITR on or before the due date to avoid the highest rate of Interest.
If you are looking for tax savings this season, then look no more. We have come up with an interesting blog on the evergreen topic of whether ELSS is better than any other tax-saving scheme. And what’s more interesting is that we have also summed up answers to every Why of yours. So what are you waiting for? Let’s skip this journey to the main content.
What options do you have for tax saving instruments?
Income Tax Act allows a deduction from the gross total income if the taxpayer invests in allowed tax saving instruments. There are multiple options in which the taxpayer can make the investments and save the tax impact.
Section 80C of the Income Tax Act prescribes various modes through which the taxpayer can save the tax which is as follows:
ELSS refers to Equity Linked Saving Scheme which are mutual funds that invest 80% or more in equity. These are very attractive from viewpoint of returns but carry little more risk as compared to other saving alternatives.
PPF refers to Public Provident Fund which requires the taxpayer to open the PPF account in any of the authorized banks. Lock-in period is 15 years with partial withdrawal allowed once in a lifetime.
Life Insurance Premium
Life Insurance Premium paid towards self and family are allowed as a deduction under section 80C of the Income Tax Act.
These are 5 years term deposits that can be maintained with any bank. However since the interest rates are falling, Bank Fixed Deposits are a little lesser attractive from the perspective of tax saving.
NSC refers to National Saving Certificate as another tax-saving instrument that has a lock-in period of 5 years. It has a guaranteed return which changes periodically.
ULIP refers to Unit Linked Insurance Premium which can be said as a combination of mutual fund and insurance. This is more of an insurance product with investment component in it.
Why ELSS is better than any other tax-saving instruments?
- Higher returns as compared to other conventional investment instruments
- ELSS has wide exposure to the stock market which makes it a very lucrative and attractive option for tax saving as well as wealth building.
Even though there was some impact on the stock market due to pandemic, the stock market has bounced back up. This has resulted in a huge surge in absolute returns derived by the ELSS especially.
In all, ELSS comes with higher returns even if not guaranteed, around 12-15%. In every sense, it beats the inflation rate.
High liquidity due to the lowest lock-in period
ELSS has the lowest lock-in period of 3 years which can be termed as lowest as compared to other tax-saving investments which are a minimum of 5 years.
Since ELSS has the lowest lock-in period, it is suited best to short-term to medium-term financial goals also. Hence, it allows the investor to manage the liquidity position in a short time span.
Highly flexible mode of investment
ELSS allows you to switch between the mutual funds pertaining to the same AMC (Asset Management Company) or any other AMC. Some of the ELSS also allow switch options within their AMC as a mandate action discretionary upon the investor.
Single Demat account required
ELSS investment needs to be made through a Demat account which can also be used for investing in shares and securities. So investors get to invest in various types of instruments in a single Demat account. This helps the investor to keep a single control over investments.
Why choose ELSS over other saving instruments?
|Type of Instrument||Linked to the stock market since almost 80% or more is invested in equity||Government-backed saving instrument||Combination of equity/Debt exposure and a portion of insurance where insurance is the core service area||5 years term deposit with any bank|
|Lock-In Period||3 years||15 years||5 years||5 years|
|Risk %||Moderate to high||Low since the returns are guaranteed by the government.||Moderate to high due to a combination of equity exposure and insurance portion.||Low since they carry a fixed rate of interest|
|Return||Highest return in the brackets of the tax-saving instruments around 10-13% or even more provided high-risk appetite is assumed||Fixed-rate of return is prescribed by the government which may or may not be changed periodically. However the current rate of return revolves around 7.10%-7.60%||Even if the ULIPs have absolute returns of 10-12%, most of the portion of returns is allocated towards mortality costs etc. hence it impacts the effective return in the long run.||Fixed Deposits have interest rates of 6.5% -7% currently. Due to falling interest rates, it is difficult to predict whether the bank FD rates will pick up 0r further go down which may seriously affect the effective return|
This gives us the fair idea that investors should go for ELSS if they have a moderate to high-risk appetite and desire to earn lucrative returns. ELSS is a dynamic form of investment that can be used as a tax-saving instrument as well as a wealth-building tool. It is always up to the discretion of the investor whether to go for a decent rating and moderate returns, which is a good combination of risk-reward ratio. Nevertheless, it comes at a low cost and also can be invested in lumpsum or SIP which makes it easier to maintain liquidity. In all, a win-win situation for the investor.
Some of the facts which you don’t know about Budget 21. Here is the list
1. ULIP maturity is TAXABLE. Budget 2021 has proposed not to provide tax exemption under section 10(10D) of Income Tax Act for maturity proceeds of the unit-linked insurance policies (Ulips) with annual premium above ₹2.5 lakh. The rules will apply for Ulips issued on or after 1 February 2021. According to Budget memorandum, “Under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.”
Related Article: ULIPs with an annual premium above ₹2.5 lakh to be taxed.
2. TDS deduction by buyer if paying more than 50 Lacs in a year for purchase of Goods. Section 194Q of Income Tax. (1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 per cent. of such sum exceeding fifty lakh rupees as income-tax. Explanation.––For the purposes of this sub-section,
“buyer” means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
3. Limit of tax exemption of Interest on Provident Fund: In order to rationalise tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earn on the employee’s contribution to various provident funds to the annual contribution of Rs 2.5 lakhs. This restriction shall be applicable only for the contribution made on or after 01/04/2021.
4. Relaxation to NRI for Income of Retirement Benefit Account: In order to remove the genuine hardship faced by the NRIs in respect of their income accrued on foreign retirement benefit account due to mismatch in taxation, it is proposed to notify rules for aligning the taxation of income arising on foreign retirement benefit account.
5. Timely deposit of Employees’ contribution to labour welfare funds by Due Date: Delay in deposit of the contribution of employees towards various welfare funds by employers result in permanent loss of interest/income for the employees. In order to ensure timely deposit of employees’ contribution to these funds by the employers, it is proposed to reiterate that that the late deposit of employees’ contribution by the employer shall never be allowed as deduction to the employer.
6. Exemption for Leave Travel Concession (LTC) cash scheme: In order to provide relief to employees, it is proposed to provide tax exemption to the amount given to an employee in lieu of LTC subject to incurring of specified expenditure.
Finance Minister in budget 2021 has made the maturity proceeds of the unit-linked insurance policies (Ulips) taxable. However, it will be taxable only if the annual premium is above ₹2.5 lakh. The rules will apply for Ulips issued on or after 1 February 2021. According to the Budget memorandum, “Under the existing provisions of the Income Tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.”
Are you wondering what will be the tax rate?
Ulips will be taxed at 10%, above an annual exemption of ₹1 lakh, at par with equity mutual funds. It is an attempt to rationalize taxation of Ulips. The non-exempt Ulips shall be provided with the same concessional capital gains tax regime as available to the mutual fund to provide parity with equity mutual funds.
Currently, the entire amount received under a life insurance policy is exempt under section 10(10D). Section 10(10D) of the Income Tax Act exempts any amount received under a life insurance policy including Ulips, if the sum assured is more than 10 times the annual premium. This exemption includes death benefits, maturity benefits and accrued bonus. It means until now, there was no upper limit applicable to the claim against a life insurance policy.
Everyone wants to be safe and make the optimum utilization of their funds. However, not every financial instrument is made up of everyone. Financial Advisors always look at the following angles before advising the investment alternative.
- Short term Goal
Tax saving instrument, Interest earning, etc.
- Medium-term Goal
Wealth building instrument, Value Investing, Mutual Funds (dividend option), etc.
- Long Term Goal
Related Article: 5 Factors To Consider While Making Lump-Sum Mutual Fund Investment
Retirement Planning, Succession Planning, etc.
Each phase of human life needs a peculiar and appropriate investment instrument. Let’s understand how should you choose and opt for the appropriate option of ULIP or Mutual funds.
What are ULIP and Mutual Funds?
ULIP refers to Unit Linked Insurance Premium which is a unique insurance plan, which integrates benefits of both insurance and investment in a single instrument.
In all, it can be said that ULIP is a Hybrid instrument and not a pure insurance policy. ULIP will allow the flexibility to go for wealth building while being under insurance cover.
Mutual Funds refer to the investment pool which is managed by a professional portfolio manager. Any mutual fund would be divided into a number of small units. These units are calculated based on the basis of Mutual Fund’s Net Asset Value.
Difference between ULIP and Mutual Funds
|ULIPs include both the components of Investment Insurance||Mutual Funds are purely an Investment instrument.|
|ULIPs carry a Lock-In period of 5 years. ULIPs can not be fully or partially withdrawn during this Lock-in Period.||Mutual Funds are Liquid Financial Instrument since these can be redeemed or sold in the market at any time. (apart from ELSS which have Lock-in Period of 3 years)|
|ULIP do not display or present their structure of investment on public domains for the general public. This is because ULIPs have a very complex structure hence becomes a little less transparent as compared to Mutual Funds||Mutual Funds carry a simple investment structure which is determined at the inception of Mutual Fund only. Hence, Mutual Funds are much more transparent since the smallest detail about their investment structure are usually hosted on public domain.|
|ULIPS are good for tax management because Investment in ULIP is considered as a deduction from taxable income under section 80CMaturity amount is tax-free under section 10(10D)||Tax impact with respect to Mutual Funds can be summarised as below Investment in Mutual Funds is covered under section 80C only if the same is ELSS (Equity Linked Savings Scheme)Maturity amount / Redemption amount / Amount on sale is taxed as capital gains|
|ULIPs come with several charges like Fund Management Charges, Mortality Charges etc. This will result in a reduction of pure investment corpus which would actually be deployed for return earning purpose.||Mutual funds on the other hands are not burdened with the Mortality charges and also expense ratios are competitive. This results in better-earning prospect even with the impact of exit and entry load|
|ULIP are subject to discontinuance charges when they are redeemed prematurely. This would impact the return.||Mutual funds are subject to only exit load even if withdrawn before the expiry of Lock-in Period. This would not impact the returns already earned during the period of investments.|
Related Article: Postal Recurring Deposits Vs. Mutual fund SIPs
Case Study Analysis for ULIP Vs. Mutual Funds
Let’s take an example of Mr Mehta who is in aged 30 years. He wants to invest in credible and safe investment instrument which will put his funds to optimum utilization. His annual income is Rs.20 lakhs and he is ready to invest Rs.2 lakhs maximum in a year
Mr Mehta is contemplating 2 alternatives for investment; One is ULIP and another is Mutual Funds
A financial advisor has suggested Mr Mehta to invest in ULIP for 20 years which would earn him a decent rate of return and an additional insurance cover. This ULIP is estimated to earn a rate of return around 10-12% since it is market-linked.
In this case, if Mr Mehta thinks that he could allocate the whole of his excess towards the ULIPs. This would result in the following scenarios
- The insurance cover in ULIP is only proportional and usually on the lower side. This would only give him insufficient cover in the long run. Suppose Mr Mehta goes for Rs.50,000/- in a year, it would only give him Insurance cover of Rs. 5,00,000/- in the long run.
- The returns fetched would be first allocated towards charges and the commission so the effective rate of return earned on ULIP would not reach the target rate of return.
- If Mr Mehta wishes to switch or discontinue the ULIP, it would only wipe off the return earned so far and would result in a reduction of the corpus.
It would only make sense if Mr Mehta invests in ULIP at an early age and only a part of his targeted investment amount.
Suppose Mr Mehta wishes to invest in Mutua Funds it will Give him following results
- Mutual fund Investment is directly related to the market and hence the investment would always be subject to market risks.
- However, since the entire investment would be directed towards corpus, it would result in wealth building.
- It will not have any additional insurance cover
- ELSS will have tax benefit as well and would earn a decent rate of earnings
An ideal plan would be as below for Mr Mehta
- Opt for ULIP for 1/4th of his target investment amount which would give him leverage of diversified investment bucket. Suppose he opts for Rs.50,000/- ULIP annually, then it would give him an effective rate of earnings of 10% maximum and insurance cover of Rs.5 lakhs to 7 lakhs. However, this money will be locked in and would be able for withdrawal only after 6-7 years depending upon terms and conditions.
- Choose a mutual fund based on the risk appetite and financial goal. An equity-based mutual fund or Index funds have the lowest Expense ratios. Also, they have the safer potential of earnings since they are directly linked to markets. Mr Mehta in this case can go for the lumpsum investment of almost 50-60% of target investments or through SIP plan.
- Mr Mehta can consult with Insurance Advisor for additional insurance cover which would be sufficient for his age. Ideally, he should choose an insurance cover of almost 10 times of his annual income which would be Rs. 2 crores as his sum insured.