How do you choose an investment that helps you save tax? When you research, you should ideally look at an investment that will help you build a corpus over time. Some of you may take a conservative route by investing money in a Public Provident Fund (PPF), while others may opt for an instrument such as Equity Linked Savings Scheme that may be subject to market risks but aid you in growing your corpus at a quicker rate. Both PPFs and ELSS offer tax benefits to the investor. Let us find out the best tax saving investment options between the two. But before we begin the comparative study, let us understand PPF and ELSS briefly.
ELSS mutual funds and PPF
ELSS offers tax exemption under Section 80C of the Income Tax Act. In ELSS, a major portion of the fund is invested in equities and the fund’s performance depends upon the stock market since returns accrued from ELSS funds are market-linked. PPF, on the other hand, is a more traditional investment instrument that the Government of India introduced to encourage people to inculcate the discipline of saving money, especially for their old age.
Now that we know the definitions of ELSS and PPF, let us compare the two tax-saving investment instruments to find out which is a better investment option. There are seven factors to help us make the differentiation.
ELSS vs PPF
PPF is backed by the government of India which makes it a safe investment, whereas ELSS funds are equity linked, which means that they are subject to market risks.
PPF investments qualify for EEE (Exempt Exempt Exempt) i.e. the investor is exempt from taxes while investing, accumulating and withdrawing his investment, whereas you have to pay a 10% long-term capital gains tax on profits of over Rs 1 lakh for ELSS investments.
The rate of interest on PPF investments is declared by the government of India every year. This is typically between 7% and 8% per annum. ELSS, on the other hand, is market-linked which is why the returns may vary depending upon the scheme chosen by the investor. However, ELSS investments can offer returns ranging from 12% to 14% per annum.
PPF investments come with a minimum lock-in period of 15 years, with partial withdrawals permitted after the completion of six financial years. ELSS mutual funds on the other hand, have a mandatory lock-in period of 3 years with no room for premature withdrawals.
You may invest a minimum of ₹500 and a maximum of ₹1.5 lakh in PPF per annum. This investment can be made in lump sum or in instalments so long as it doesn’t exceed the maximum amount. With ELSS, there is no limit to how much you can invest however you are eligible for tax deduction on investments not exceeding ₹1.5 lakh per financial year.
Maximum investment tenure
You can continue to invest in PPF funds for a maximum tenure of 5 years, after which you can extend it for 5 years at a time. However, there is no maximum tenure with ELSS investments.
The verdict – ELSS vs PPF
As is evident, PPF investments are safer but they offer lower returns in the long-term as compared to ELSS. While the tax benefits are better for PPF investments, investors can probably earn higher returns with ELSS investments, so long as the investor is willing to risk market volatility. The final verdict is that although ELSS can create wealth faster for the investor in the long-term, the investment should be made as per your financial goals and personal preferences.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Salaried employees need to thoroughly chalk out their annual tax plan. They are required to make some important decisions at the beginning of each financial year and ensure they adhere to their plan. But tax planning takes a lot of discipline. You must ensure that your investments can do both; exempt you from certain taxes and safeguard your investment objectives so that you can fulfil your financial goals. Let us look at some of the best tax saving options in India for salaried employees. Maximise 80C- PPF and ELSSPPF or Public Provident Fund account holders can avail tax benefits by depositing as much as ₹1.5 lakh per year in their PPF account. You can deduct the amount you invest in PPF from your income and reduce your taxable income. The interest earned on PPF deposits is also tax-free. ELSS or Equity Linked Savings Scheme is another worthy investment option that provides income deductions of up to ₹1.5 lakh per financial year. It is one of the most popular options among 80C investments despite the introduction of long-term capital gains on equity investments last year. Over the long term, ELSS has the potential to provide higher returns than most other investments and comes with a shorter lock-in tenure of only three years. Maximise 80C- PPF and ELSSA social security initiative launched by the Central Government, the National Pension Scheme or NPS enables investors to avail tax benefits under various sections of the Income Tax Act such as: Under Section 80CCD (1) – In a financial year, investment of up to ₹1.5 lakh is eligible for deduction, within the overall ceiling of ₹1.5 lakh under Section 80C. Under Section 80CCD (1B) – Investors are eligible for an additional tax benefit on investments up to ₹50,000. If a taxpayer contributes over ₹1.5 lakh to NPS, the amount exceeding ₹1.5 lakh may be claimed as a deduction. Under Section 80CCD (2) – Exceeding the ceiling limit of ₹1.5 lakh and the additional limit of ₹50,000, investors are also eligible for deduction on employer contribution up-to 10% of salary (basic + DA) without any monetary limit. Maximise Health Insurance SavingsFor tax saving options other than 80C, you can put your money in health insurance. Buying health insurance is as wise as it is vital because it safeguards your family and you during medical emergencies by covering the cost of the treatment. Apart from offering services like cashless hospitalisation facility, it also comes with several tax benefits. You can avail income tax exemption under Section 80D, based on the premiums you pay on health insurance policies purchased for yourself, your family (spouse and children) and parents. However, the deduction depends on the person insured. Payment should be made through methods other than cash. If you are under 60 and purchasing health insurance for yourself, your spouse and dependent children, you are eligible for a maximum deduction of ₹25,000. If you are paying for health insurance for your parents under 60 years of age, you become eligible for an additional deduction of ₹25,000. If they are over 60, you can claim up to ₹50,000 If you are over 60, you can claim a deduction of ₹50,000 on premium paid towards health insurance for yourself and your family. If you are also paying the insurance premiums for your senior parents, then you are eligible for an additional deduction of ₹50,000 making your total savings ₹1,00,000. You can also claim up to ₹ 5,000 (paid in cash) for your medical check-up, within the above-mentioned limit. Take a joint home loan- the big tax saverJoint home loans can also prove to be a great tax saving option for salaried employees. If you and your spouse, sibling or any other family member are on a payroll; you can avail several tax saving benefits provided both applicants are registered as co-owners of the loaned property, co-borrowers of the loan and the construction of the property is completed. Each co-owner is eligible for a maximum deduction of ₹2 lakh on interest. The total payable interest on the home loan is allocated as per the ratio of ownership held by each owner. If you and your spouse purchase a home and are paying ₹5 lakh in interest, with each of you holding a 50:50 share in the property, you can both, individually claim ₹2 lakh each i.e. a total of ₹4 lakh as joint owners, in tax returns. Maximise HRA benefitAll salaried employees can avail tax exemption on a part of their HRA or House Rent Allowance as per Section 10 (13A) of the Income-tax Act. HRA benefit is provided to those employees living in rented homes. For HRA tax exemption, the deduction is the lowest amongst the following: The actual HRA received from your employer Total rent minus 10% of salary (this includes basic + Dearness Allowance, if any) Rent equal to 50% of the salary in metro cities or 40% of the salary in non-metro cities. Individuals paying over ₹1 lakh towards house rent can claim HRA tax exemption provided they furnish the property owner's PAN details, along with rent receipts. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Earning money is a great and ecstatic experience. Especially, for people who have just started on a new job, receiving their monthly salaries can be exciting. However, a lot of youngsters today are more interested in spending that money instead of investing it. It is important to inculcate setting financial goals early in life and reap the benefits of financial planning. There is a common misconception that financial planning and investing money is only for older people. On the contrary, it is very beneficial to set up financial goals at an early stage.Setting goals the right wayPeople invest money so that they can have enough money to meet their financial goals in the future. Here is some goal setting tips using an example. Let’s see how to set financial goals and some common financial goals of Mohan, a government employee. A lot of people in the country have various types of financial goals and the above-mentioned are some such examples of goals on their wish list. However, from a financial and investment standpoint, these goals are vague.For instance, let’s take the first goal: Buy a car.Invariably, there are a lot of follow-up questions that arise when Mohan says that he wants to buy a car.What type of car does he want to buy? How much does the car cost? When does he want to buy it: Next month, next year or two years later?Goal setting tips It is very important to ask the aforementioned questions because only then can you set a goal that is clear and definite.There are two very important factors to consider whenever you set a goal: a) Time estimateb) Cost estimateWhen you know these two components, it becomes easier to take the right course of action in order to achieve the goal.In this example, Mohan can say: “I would like to buy a car that costs Rs 8 lakh in the next twelve months.”Benefits of financial planning1) Achieving your milestonesIt is crucial to meet financial goals at the right time. Imagine if you have reached your retirement age but your retirement fund is not as large as you expected! Proper financial planning can help you meet your goals successfully. 2) Beating inflationAs the years pass, inflation reduces the purchasing power of an individual. For example, imagine you have Rs 100. With this amount, you can buy 10 glasses of milk today. But after ten years, you may be able to buy only 5 glasses (or less) with the same amount. As a result, it is important to actively plan and monitor your financial situation regularly. 3) Back-up in case of emergenciesNobody knows when an emergency situation can rise up. Situations such as accidents, loss of job, or other unforeseen events do happen. But when they occur, it is always better to be prepared financially. By creating an emergency fund, you can take care of yourself and your family during such events.ConclusionSetting goals is necessary. But for these goals to fructify, it is necessary to do it the right way. Identify your financial needs and requirements as precisely as possible. And once you do that, you can make better investment decisions. What next?Everyone has goals. But they keep changing at different stages of life due to evolving circumstances. At an early age, new career beginners are eager to save or spend on a new vehicle or lifestyle appearances. However, as they grow older, priorities shift and goals such as family and retirement come into play. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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