One of the most well-known and preferred tax deductions available to taxpayers is Section 80C, which enables them to claim up to a maximum. 1.5 lakh per annum from their total taxable income by making investments that reduce their tax liability. Popular instruments include Fixed Deposits, Unit Linked Insurance Plans (ULIPs), National Pension Schemes (NPS), Small Savings Schemes and many others that can be invested under Section 80C. However, apart from these schemes, Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are the two most sought-after tax-related instruments. The rationale for this is that PPF is the only debt instrument that has exempt-exempt-exempt (EEE) status, whereas ELSS has the shortest lock-in period as compared to all other investment strategies that offer tax exemption under section 80C . Let’s take a look at which instrument you should choose as a taxpayer.
ELSS Fund
ELSS funds are nothing more than flexi cap funds which are covered under section 80C and enable maximum tax deduction 1.5 lakh annually. Considering that ELSS has the shortest lock-in period of 3 years under the tax-saving investment category, it is the most popular scheme among tax-savers. By investing in ELSS mutual funds, you can avail tax benefits of up to Rs. 1,50,000 and save up to Rs. 46,800 in annual taxation if you fall in the highest tax bracket of 30 per cent.
ELSS funds mainly give returns by investing in equity and equity related instruments. Since the funds invest in market capitalization including large, mid and small caps, with 65% of the portfolio allocated to equities, ELSS funds also called flexi cap funds are best known by financial advisors for portfolio diversification over the counter market. is more preferred. instability.
If investors hold their investments for a longer period, ELSS mutual funds can provide returns that outweigh inflation. Investors can invest in ELSS either in lump sum or through Systematic Investment Plan (SIP) with a minimum investment of Rs. 500 per month. ELSS returns are based on how well the underlying securities perform, and the funds are benchmarked to Nifty 500 TRI.
The fact that you can partially or fully withdraw your ELSS units after the lock-in period of three years is over, indicates the liquidity of these instruments. In terms of tax treatment, from ELSS to capital gains 1 lakh in a financial year are tax free and capital gains. 1 lakh are subject to long-term capital gains (LTCG) tax of 10%.
PPF
Public Provident Fund (PPF) is the only government-backed debt instrument that qualifies for triple tax exemption under Section 80C, or exempt-exempt-exempt (EEE) status. This shows that the amount you invest is up to Rs. 1,50,000 can be deducted from your total taxable income, the interest earned by you is tax-free, and the maturity amount you get after the lock-in period of 15 years is also completely tax-free, thereby It is one of the best tax-saving tools. for taxpayers.
The government guarantees capital protection in PPF, which is attracting risk-averse retail investors. However, investors should be aware that PPF has a lock-in period of 15 years and premature closure is allowed after 5 years of account inception. For the quarter July 2022 to September 2022, the PPF will continue to pay an interest rate of 7.1% per annum (compounded annually), which is higher than the current retail inflation rate of 6.71%. Historically, PPF has provided returns that have outperformed inflation and even bank fixed deposits.
PPF interest rates are not fixed as they are based on quarterly revision of the government based on the performance of bond yields. Due to the fact that liquidity is an important factor for debt investors, PPF account holders are allowed a partial withdrawal every financial year after five years, except in the year of account opening. After the PPF account reaches maturity after 15 years, the account holder has the option to extend the account for 5 years, take the maturity amount, or keep the maturity value in the account without making any additional deposits, for which The prevailing PPF interest rate will be effective.
Where to invest?
For investors who cannot opt for ELSS or PPF for tax saving purposes, Nitin Rao, Head Products & Proposals, Epsilon Money Mart said, “Equity Linked Savings Scheme (ELSS) is a type of mutual fund that offers benefits. A subscriber can avail tax exemption of up to INR 150,000 by investing in ELSS funds under Section 80C of the Income Tax Act, 1961. ELSS has the shortest lock-in period as compared to all other investment options, which is Provides tax exemption like PPF etc. However, ELSS invests in equity market, hence investor runs the market risk on his investment. Having said that, ELSS has historically been better than any other traditional investment option like PPF Returns given. On the other hand, PPF offers similar deduction under Section 80C of the Income Tax Act, 1961, but provides a fixed rate of return which is defined by the regulatory body. The lock-in for PPF investments is also higher i.e. 15 years.The main advantage in PPF is that at the time of maturity, the amount received on the amount is Rs. The interest is completely tax free.”
He further added that “Investors should invest according to their risk profile and investment horizon. Both ELSS and PPF offer similar tax benefits, but the risk-reward matrix is different. An investor who wants to participate in equity markets and more One should invest in ELSS with risk appetite and for capital conservation purpose a conservative client should look at PPF investment.”
Disclaimer: The views and recommendations given above are those of individual analysts or broking companies and not of Mint.
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