Money saved is money earned. But saving on income tax shouldn’t be the sole purpose of investing in tax-saving investments. These investments usually come with long-term lock-in periods and have been designed in a manner that can help you plan for financial goals like your children’s education or wedding and your own retirement. Allow us to tell you how.
Popular tax-saving investments
The three most widely-used tax-saving investments are Public Provident Fund (PPF), Tax-saving Fixed Deposits (FD) and Tax-saving Mutual Funds also known as Equity Linked Savings Scheme (ELSS). The best tax-saving portfolio would have exposure to all of these three options because all three have unique characteristics that can help you earn higher returns while helping you save taxes.
Why invest in PPF
Let’s take PPF. This long-term savings plan comes with an investment period of 15 years and gives you a guaranteed 8.7% interest (subject to change every financial year). The benefit of investing a part of your money in PPF is that it can give you stable interest and tax-free withdrawal upon retirement.
“Little known fact: You can withdraw partially from your PPF account after 6 years.”
Benefit of tax-saving fixed deposits
FDs are quite similar to PPF in the sense that they provide assured returns as well, in the range of 7-8%. The benefit of investing in tax-saving FDs is that they come with a lock-in period of only 5 years. Upon maturity, you get the invested amount. The interest is paid at pre-decided intervals after tax is deducted at source.
“Little known fact: Investing in a tax-saving FD is easier than opening a savings account.”
Beating inflation with ELSS
Great, now that you have made investments that will earn you assured returns, you need to make sure that your portfolio earns more than the prevailing rate of inflation. This is where ELSS funds come in. These mutual funds invest in the equity market, which means they can earn higher returns over the long run. The benefit of investing in ELSS funds is that they come with a lock-in period of a only 3 years and all the returns that you earn will be completely tax-free.
“Little known fact: Even after completion of the 3-year lock-in, you can stay invested in tax-saving mutual funds to get the benefit of compounding interest.”
Tax-saving portfolio allocation
This is how by spreading your tax-saving investments across different avenues gets you the best of everything. An ideal investment mix would be 60% of whatever amount you need to invest to save taxes in ELSS funds, 30% in PPF and 10% in FDs. Such diversification will not only make your portfolio stable, but will give you inflation-beating returns as well.