How to select the best tax-saving plan - Business2Business

Harsh is an employee who is paid in the 30% tax bracket. The tax-saving season has begun and you are evaluating your investment options. As an investor, he believes that he should seek options that not only help him save taxes but also achieve tax-free returns. If earned income is taxable, your ability to make money, in the long run, will be restricted, as taxes eat up your income and negatively affect compounding benefits. For example, his after-tax return on a 7% 5-year fixed bank deposit of 7% would drop to about 4.9% per year. He wonders what products are right for him this year.

PPF is an ideal option for investors who do not want volatility in returns like stocks. However, for long-term objectives and to mitigate the risk of hyperinflation, some exposure to equities may be considered, preferably through mutual funds, including ELSS tax savings funds, and not fully dependent on PPF. Having said that, ELSS no longer has EEE benefits (exempt - exempt - exempt). Harsh will have to pay a 10% tax on long-term capital gains in excess of Rs 1 lakh in a tax year. Additionally, ELSS dividends will also be taxed in the hands of Harsh at a marginal tax rate (30%). Therefore, for someone investing in ELSS, choosing the growth option over the dividend option will yield better tax returns. Once he has expired the initial three-year lockdown period, Harsh can continue ELSS investments in a manner similar to an open-end mutual fund scheme.

Ulip is a hybrid product, a combination of protection and savings. According to recent regulations, if the annual premium of Ulip's new investment is more than Rs 2.5 lakhs, the maturity exceeds will not be exempt from tax. If Harsh is comfortable investing in ELSS and at the same time has a pure term insurance plan, he will not need to buy any from Ulips. In addition, Harsh must ensure that the savings program through Ulips is at least 10 years old.

Traditional insurance plans can be a gift, a rebate, or a whole life plan, which has a savings component and comes with a fixed term and a guaranteed fixed amount. While the premium paid qualifies for a tax benefit under Section 80C, the benefit value and death benefits are exempt from tax. However, traditional insurance plans generally have low returns, largely between 4% and 7% per year, and provide a limited range of accumulation over a period of time. The same could apply to other guaranteed products that also provide a tax exemption u/s80C. Sukanya Samriddhi Yojana (SSY) offers the highest tax-deductible performance, currently in the category of government savings plans, with a sovereign guarantee and comes with Exempt Exempt Exempt(EEE).

For most investors like Harsh, the ideal would be to choose EEE tax savers. Both the capital invested and the income are exempt from tax under the Income Tax Law. That being said, when choosing a product, you also need to consider its total return and wealth-building potential.

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