If you have been looking around for some tax saving investments for this assessment year 2018-19, there are plenty of fixed income options available. However, if you are an aggressive investor looking for a chance of better earnings along with tax saving, perhaps the list is shorter. In this article, we offer you three prominent tax saving investments for aggressive investors like you.
Are You an Aggressive Investor?
You are an aggressive investor, if you are looking for tax saving and fixed return instruments are not appealing to you. Perhaps, the market-linked (or equity) tax saving investments would be better. Market-linked tax saving investments invest in the capital (stock) markets and offer a variable rate of return.
So, which of these Stock Market Investments are going to save tax for you this year?
Equity Linked Savings Schemes (ELSS)
Also known as the tax saving Mutual fund schemes, are by far popular amongst individual investors and HUF’s, who intend to create wealth through higher inflation-adjusted returns. Some of the distinguishing features about them are :
- The amount invested in ELSS qualifies for deduction u/s 80C (According to Income Tax Act, 1961) up to a sum of Rs.1.50 lakhs per annum
- Returns from such funds are tax-free as it is an equity mutual fund where you are investing for more than 3 years period. (Due to lock in period of 3 years)
- Minimum investment can be made with no upper limit.
- Both lumpsum and SIP Mode is available for investing. (if SIP Mode is chosen for the purpose of compounding and Rupee cost averaging, then each of the units needs to complete the full lock-in period.).
- Withdrawals are allowed post lock-in
- Dividends and capital gains are tax free
- To mitigate risks, one may diversify across more than one ELSS scheme (based on market capitalization and industry exposure )after considering their long-term consistent performance.
Though the ELSS funds invest in equities, they are different from other open-ended diversified equity funds. Due to the lock-in period, the ELSS fund manager does not have to worry about redemption pressure from investors. This gives him the freedom to invest in shares as per his conviction and hold them for longer periods. In the past few years, the ELSS category has consistently outperformed the large and mid cap sub category of diversified equity funds.
Unit Linked Insurance Plans (ULIP’s)
ULIP is a hybrid product, a combo of protection and saving. It not only provides Life Insurance but also helps channel one’s savings into various market-linked assets for meeting long-term goals. ULIPs are those tax saving investments which fall under EEE category. That is:
- Investment is Exempt
- Interest or Dividend Accruals are Exempt
- Maturity Value is also Exempt
Buyers must understand that ULIP is not necessarily an equity-linked investment. You can also invest your ULIP Corpus in debt funds. Right now, debt funds are looking attractive because of the possibility of a drop in bond yields, while the equity markets are looking overheated. instead of investing in the equity option, put your corpus in the debt fund.
You can start shifting the money to the equity fund when the prospects look rosier. only a ULIP allows you to switch from debt to equity, or vice versa without incurring any capital gains tax.
In most ULIP’s there are 5 to 9 fund options with varying asset allocation between equity and debt. A ULIP can have a duration of 15 or 20 years or more but the lock-in period is 5 years. The fund value on exiting the policy (allowed after 5 years)or on maturity is tax-free. Any switching between the fund‘s options irrespective of the holding period is exempt from tax.
The premium paid for ULIP’s qualifies for a deduction u/s 80c (of Income tax act, 1961)subject to the maximum eligible amount of Rs. 1.50 lakh p.a. Also at maturity, the amount received (by you or your beneficiary)is exempt from tax u/s 10(10D)of the Income Tax Act, subject to specified conditions.
New Pension Scheme (NPS)
NPS is a low-cost tax saving investment based on mutual fund structure. Flexibility and life-stage based automatic rebalancing features make the New Pension Scheme an ideal investment vehicle for retirement planning. One can voluntary contribute/invest in New Pension scheme through various intermediaries so as to build a retirement kitty.
There are two accounts Tier 1 and Tier 2.
Tier 1 account
In this account, the minimum investment is Rs. 500 per contribution and Rs. 6000 a year. Minimum 1 contribution in a year is required. Premature withdrawal is not permitted before you attain 60 years of age. If one retires before 60 years, 80% of the amount accumulated has to be utilised by you to buy a lifetime annuity.
After 60 years, 40% of the amount accumulated has to be utilised to buy a lifetime annuity.
Tier 2 account
For opening this account, the minimum investment is Rs. 1000 per annum. Minimum 1 contribution in a year is required subject to a minimum contribution of Rs. 250 . If you open an account in the last quarter of the financial year, you will have to contribute only once in that financial year
You will be required to maintain a minimum balance of Rs. 2000 at the end of the financial year. Moreover, in order to have tier II account, you first need to have a tier I account. Tier II account is a voluntary account and withdrawals will be permitted under this account, without any limits.
In 2017 Union Budget of India, 25% exemption of the contribution made by an employee has been announced as a form of premature partial withdrawal in NPS. This amendment will take effect from 1 April 2018 and will accordingly apply in relation to the assessment year 2018-19.
Investment in NPS is eligible for tax benefits as follows:
- Upto Rs. 1,50,000 under section 80 CCD(1) . The benefit is additionally capped at 10% of basic salary. The benefit under section 80 C , 80CCC and 80CCD(1) is capped at 1,50,000.
- Contribution upto Rs. 50,000 under section 80CCD(1B). This is over and above tax benefit under Section 80CCD(1b) .
- Employer co-contribution up to 10% of basic and DA without any upper cap in terms of amount is tax-free income in hands of employees under section 80CCD(2).
Market-linked tax saving investments for aggressive Investors – A Snapshot
|Schemes||Tenure / Lock in||Min/Max Investment||Premature Withdrawal||Tax on Returns|
|Equity Linked Savings Schemes (ELSS)||No limit on tenure, Lock-in period: 3 years||Varies from scheme to scheme. Can start at Rs. 500. No upper limit||Withdrawal allowed post lock-in||Dividend and capital gains are tax-free|
|Unit Linked Insurance Plans (ULIP’s)||Tenure: 10-20 years; Lock-in period: 5 years||Premium varies from scheme to scheme||Yes||Capital gains post lock-in are tax-free|
|New Pension Scheme||Tenure : 30-35 years (for tier 1 a/c); Lock in till 60 years||Rs. 500 per month or Rs. 6000 per annum, no upper limit.||Yes, but allowed only in tier II a/c||Capital gains taxed on withdrawal|