It goes on without saying that every person, in today’s world, is scouting for ways of saving tax. But it ain’t straightforward. In this blog, we seek to discuss how can you invest lump sum if you happen to receive Rs 10 Lakhs and save tax.
So the situation here is – you have received Rs 10 Lakhs from a source, and you seek to invest the same to save tax. To save tax, you can –
- Invest Rs 1.5 Lakh in tax saving avenues that come under section 80C.
- Invest Rs 50,000 in National Pension Scheme under section 80CCD (1B).
- Pay a premium for your medical insurance or your parent’s medical insurance. In this case, you get the benefit of Rs 25,000 for self and Rs 30,000 for senior citizen parents under section 80D.
- Avail limitless tax benefit that is equal to the interest paid on your education loan.
Net-net, if you have an education loan, you can save high taxes but if you do not have an education loan, you can get Rs 2.5 tax benefits. Now if you have lumpsum Rs 10 Lakhs, you should put the majority of the money in avenues that fall under section 80C.
Let us see section 80C, its benefits, instruments in greater detail.
How much tax can be saved under section 80C?
Section 80C of the Income Tax Act provides for tax benefits to individuals up to Rs 1.5 Lakh every year. However, there are limited instruments approved by the government for such benefits.
Some of the tax saving instruments that provide you tax benefits under the said section are detailed in the table below –
|Investment Instrument||Risk Profile||Returns||Guarantee||Lock-in period|
|Public Provident Fund||Risk-free||7-8%||Yes||15 years|
|National Pension Scheme||Equity-linked||8-10%||No||Until retirement|
|National Savings Certificate||Risk-free||8-10%||Yes||5 years|
|Fixed Deposits||Risk-free||8-10%||Yes||5 years|
|Unit Linked Insurance Policy||Equity-linked||8-10%||No||5 years|
|Sukanya Samridhi Scheme||Risk-free||8-10%||Yes||21 years|
Let us now shift our focus to the best instrument in section 80C. The instrument is nothing but ELSS fund that provides a dual benefit – superior returns and lower lock-in period.
What is an ELSS Fund?
An ELSS fund or equity-linked saving scheme is top-rated among investors as they are tax saving funds. The funds provide tax benefits of up to Rs 1,50,000 per year under the section 80C of the Income Tax Act.
Given these funds provide tax benefits, they come with a lock-in period of three years, which is lower than any other instruments that offer tax benefits.
Investors prefer these funds because they provide tax benefits and also offer better returns as compared to other tax saving instruments due to the investments made in equities. However, ELSS also comes with higher risk as compared to other tax saving instruments such as Public Provident Fund, National Pension Scheme, or National Savings Certificate.
Some of the funds that are worth looking at include –
Aditya Birla Sun Life Tax Relief 96
The birla sun life mutual fund scheme seeks to offer long-term capital appreciation by investing 80 per cent of its assets in equity and the remainder in debt and money market instrument.
Fund Analysis –
The fund follows a combination of the top-down and bottom-up approach of stock selection and shown material improvement since 2014. This improvement led to an improved rating of five stars.
Invesco India Tax Plan
The Invesco India Tax Plan fund endeavours to provide long-term capital growth by investing in a diversified portfolio of equity and equity-related securities.
Fund Analysis –
The utilizes its bottom-up stock selection method and tends to invest across sector and market capitalization. The concentrated portfolio of around 20-50 names results in high returns over time. The fund is a great choice for investors looking for a conservative tax saving.
Axis Long Term Equity Fund
The Axis Long Term Equity Fund seeks to offer regular long-term capital growth from a diversified portfolio of equity and equity-related securities.
Fund Analysis –
The fund invests in companies with strong growth and a sustainable business model. While investing the fund scouts for a business that are scalable and comes with superior return on capital employed. The multi-cap fund did witness slowdown in 2016 but managed to recover back to its performance track record henceforth owing to the quality businesses it buys.
ELSS is an excellent way to grow money and save tax at the same time. Like any other equity mutual fund, these funds come with high risk but also compensates due to high returns it offers.
As an investor, you should ideally look to invest in ELSS only if your 80C limit is not exhausted from another avenue such as insurance premium, provident fund, and home loan principal. Remember, it doesn’t make sense to invest in ELSS if you do not have taxable income or if your limit of 80C is exhausted.