How to invest tax-efficiently| North Loop Official Blog
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08 Dec 2020

How to invest tax-efficiently

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Although taxes shouldn’t be a primary driver to make investment decisions, investing in tax-saving instruments gives investors an opportunity to benefit from tax savings as well as return on investments. Conventionally, the Indian investment scenario has several instruments to choose from that differ based on risk and returns.

The Indian Income Tax allows certain tax-saving provisions under Sec 80 C of up to Rs. 1.5 Lakh per year, and these provisions can often leave investors spoilt for choice. Most of the investment instruments dealing with the market levy taxes on investments, and in this article, we uncover some tax-efficient investing strategies you should consider.

Best tax-free investments (Under Sec 80 C of the Income Tax Act)-

As per the Income Tax Act, many sources of your income are taxable at different slab rates during a given financial year, and the set of instruments below are some of the best tax-free investments catering to the risk appetites of all investors.

1. Equity Linked Savings Schemes (ELSS)- Equity Linked Fund Schemes (ELSS Funds) are tax saving mutual funds that qualify for tax exemptions under Sec 80 C of the Income Tax Act.
In an ELSS fund, you can get a tax exemption from your income taxes for the amount you invest every year (up to a maximum of Rs. 150,000). These are funds that invest in equities (as the name suggests), and have a lock-in period of three years. Being market-linked, these instruments cater to investors with a high-risk appetite and the returns earned can be significantly more than the other tax-saving instruments.

2. Public Provident Fund (PPF)- Public Provident Fund is a government bond suited for investors with a moderate or low-risk appetite. PPFs are not market linked and hence, are one of the most secure investment instruments. PPFs have a lock-in period of fifteen years and investors would have to contribute a minimum of Rs. 500 a year and a maximum of Rs. 1.5 Lakhs per annum The investment and the returns earned on investment are deductible under Sec 80C of the Income Tax Act. PPFs earn an interest rate of 7.9% per annum compounded annually as of writing this article and the instrument is completely tax-free at the time of depositing or withdrawing.

3. National Pension Scheme- National Pension scheme is a central government scheme introduced to help individuals invest and save tax under section 80 C of the Income Tax Act. NPS is regulated by the Pension Regulatory Fund Authority of India and investments are made into equity and debt instruments. NPS has a cap of 50-75% equity exposure for non-government and 50% equity exposure cap for government employees. Though NPS is focused on retirement, the risk exposure and returns can be significantly higher than schemes such as Public Provident Funds.
Only 60% of the NPS can be withdrawn upon attaining the age of 60 with the rest being used to purchase an annuity post-retirement.

4. National Savings Certificates- National Savings Certificates or the NSC is a type of investment instrument that can be opened with any Post Office. This is a fixed income savings scheme that helps investors save tax under Sec 80 C of the Income Tax Act.
The NSC has a 5 year lock-in period and deposits earn an interest rate of 7.9% per annum. An NSC certificate can be purchased for as low as Rs. 100 and are available in denominations of Rs. 10,000, Rs. 5,000, Rs. 1,000, Rs. 500 and Rs. 100.
Being a government-backed instrument, National Savings Certificates have a relatively low-risk exposure and offer lesser returns comparatively.

5. Senior Citizen Savings Scheme- Senior Citizen Savings Scheme is a type of government scheme offered to patrons over the age of 60, offering period interest payouts over the course of 5 years (with an option to extend an additional 3 years).
Deposits earn an interest rate of 8.6% and all eligible deposits are exempt from tax under Sec 80 C of the Income Tax Act (up to Rs. 1.5 Lakh).

6. Tax Saving Fixed Deposits- All investments made in tax-saving fixed deposits enjoy the benefit of tax deductions under sec 80 C of the income tax act (up to Rs. 1.5 Lakhs).
These Fixed Deposits have a lock-in period of 5 years and deposits can be made as a lump sum or in the form of monthly deposits. The minimum deposit that can be made is Rs. 100 and deposits need to be made in multiples of Rs. 100 only. Fixed deposit interest rates can range between 5.5% - 7.5%.

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How to avoid tax on savings account?

Individuals can claim tax deductions on interests earned from savings account ( of up to Rs. 10,000) under sec 80TTA. However, only individuals and Hindu Undivided Families (HUFs) can avail claim the above deductions.

Additionally, one can also save taxes by purchasing life insurance policies under Sec 80 C, health insurance policies under Sec 80 D (of up to Rs. 1 lakh), by repaying interest on education loans and home loans, by donating to charities under Sec 80G, etc.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.