How ELSS and NPS can help you save more money on income taxes

Tax-saving tools are designed to do exactly what they say on the tin: they’re supposed to help you save money on taxes. However, in terms of returns, these tax-saving vehicles have outperformed many investment instruments over time and have contributed to wealth building. This places them among the products that provide the best of both worlds in terms of tax benefits and capital appreciation. Vikas Singhania, CEO of TradeSmart, discusses two tax-saving instruments that will help you save the most money.

ELSS

“An Equity Linked Savings Scheme (ELSS) permits an individual or HUF to deduct up to Rs 1.5 lakh from their total income under Section 80C.” The programmes have a three-year lock-in term after which the units can either be redeemed or swapped,” Vikas Singhania suggested.

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“Other benefits of the programme include the availability of both growth and dividend alternatives, as well as the ability to invest through a Systematic Investment Plan (SIP),” Singhania added.

“These schemes often experience inflows between December and March,” he continued, “since most taxpayers utilise these three months to plan their taxes.” The monthly budget stress will be reduced if the entire year is used and a systematic investment plan (SIP) is started. This will also provide them with a better starting point and allow them to take advantage of the benefits of compounding and averaging.”

“Because they invest at least 80% of their assets in equities and equity-related securities, a tax planning fund provides greater returns.”

tax

“Investors commonly employ ELSS schemes in two ways. One is to reinvest the money when the scheme matures, avoiding the need for new capital after the initial three years. The SIP approach, on the other hand, is used by those with a larger income who need to use all tax planning tools. ELSS has been employed by such investors as a long-term investment instrument. “These schemes have given between 16 and 23 percent compounded annual return rate over the last five years, depending on the schemes one invests in,” he suggested.

NPS

“National Pension Scheme (NPS) has increased in popularity among tax planners and investors,” Singhania notes. The NPS is open to everyone between the ages of 18 and 70. You can keep contributing to the NPS until you’re 75 years old and still get tax benefits.”

“The higher returns it has been delivering are the basis for its popularity. New investors in the scheme can now invest up to 75% in shares, which explains why pension funds are investing more in the market. These funds are managed by top asset management firms chosen by the government.”

Investment restrictions on tax-saving fixed deposits, income tax

“Another benefit of this strategy is that it allows you to save taxes in three different ways. NPS investments are tax deductible up to the specified maximum of Rs 1.5 lakh under Section 80C. Additional Rs 50,000 can be claimed under Section 80CCD (1b), and don’t forget that the employee’s contribution to the NPS account qualifies for a tax deduction of up to 10% of the basic salary and dearness allowance under Section 80CCD(1) of the IT Act,” he added.

“Because of their investments in equity schemes, both ELSS and NPS have provided higher returns.” Over time, equity as an asset class will provide higher returns, despite being the most volatile. “However, if one receives the benefit of tax savings as well as the opportunity to create wealth over time, these instruments can be an important aspect of one’s financial planning,” he added.