“Investing is for wealth preservation, not wealth creation, so first you have to make wealth.”
— James Altucher
- Background
As it is rightly said, three things in life are certain, Death, Taxes and Bills. However, there are multiple ways to save taxes nowadays which will help not only to save outflow of taxes currently but will also help build a corpus for future. There are various tax saver instruments available that provide tax benefit, thereby, significantly increasing the effective investment portfolio return.
As we are coming close to the end of financial year, every taxpayer would be busy in finding out the best way to save taxes. Considering the same, in this article, we have analyzed the best tax saving options that can help a taxpayer reduce his tax outgo as well as earn commensurate return over long term.
While the analysis of each instrument and its tax benefits study has been given in general, it may varies from taxpayer to taxpayer considering their other taxable income, investment horizon, risk appetite, etc. Accordingly, it would be advisable to select any of the tax saver instrument after consulting financial advisor or CA.
- Comparative summary
Comparative summary of the key Tax Saver Instrument is as under:
- Public Provident Fund (PPF)
| Return | Fixed Rate of Interest (interest rate set by the government) Current Rate of Interest is 7.90% |
| Lock in | 15 years. Can be extended for block of other 5 years |
| Advantage | Higher security |
| Disadvantage | – Very long lock-in period. Return not lucrative enough to lock the fund for such a long period – Since interest rates are reviewed periodically, will carry risk of lower interest rates going forward |
- National Savings Certificate
| Return | Fixed Rate of Interest (interest set by the government) Current Rate of Interest is 7.90% |
| Lock in | 5 years |
| Advantage | Higher security. Lower lock-in period compared to PPF |
| Disadvantage | – There is no premature withdrawal possible and hence, funds would be blocked and may not be used even in case of emergency – Since interest rates are reviewed periodically, will carry risk of lower interest rates going forward |
- Fixed Deposit
| Return | Fixed Rate of Interest (interest set by the government) Current Rate of Interest is 7.9% |
| Lock in | 5 years |
| Advantage | Higher security. Facility of premature withdrawal with penalty |
| Disadvantage | – Returns are lower than PPF and NSC. – Carries risk of Bank being declared default. However, FD worth of maximum INR 1 lakh is insured |
- Equity Linked Tax Savings Scheme
| Return | Variable and linked to market |
| Lock in | 3 years |
| Advantage | – Higher return compared to all other instruments as investment is made in listed equity shares – Can yield higher return subject to investment is made in good quality tax saver scheme – Can help in creating wealth over longer period of time as returns are far higher than inflation of our country |
| Disadvantage | – Since returns are linked to market, may generate lower return in near term – In times of market correction due to some external events such as war or financial crisis or recession |
- National Pension Scheme (NPS) – TIER 1 Account ie NPS Scheme
| Return | Variable and linked to market |
| Lock in | Lock-in till attainment of 60 years of age. Further, at maturity also, only 60% of the corpus is redeemable, balance 40% of has to be invested in annuity plan and will be given in monthly payout form |
| Advantage | Higher security. If selection of instrument is done in a right way, can help to create the wealth for retirement |
| Disadvantage | – Very long lock-in period – Post lock-in also 40% of the funds would be released in the form of monthly payout |
- Conclusion
As detailed out above, there are multiple ways to save tax, it is wise to select an option that offers you dual benefits of tax saving as well as wealth creation. Further, the investment plan differs from person to person considering his investment horizon, investment goal, risk profile, etc. Given the same, it is highly advisable to study each of the aforesaid factors in detail before making any investment in any of the tax saver instruments listed above.
Further, it would be advisable to plan taxes in advance, seek the best way to optimize your taxes and utilize the tax exemption limit completely as it would be the most critical factor in creating wealth over longer period of time.
As Warren Buffet said, “Don’t put all eggs in one basket”, it would be squarely applicable for investment in tax saving instruments as well. Accordingly, it is advisable to plan taxes in advance, seek the best way to optimize taxes, invest in different tax saver instruments considering investment goals and risk profile to build the wealth over longer period of time.
We would be publishing number of articles on Financial Instruments along with implications of Direct Taxes on it and ways to create Long Term Wealth in near future. In the meantime, do let us know your thoughts or reach out to us in case you have any query with respect to our analysis detailed out above. We can be reached out on manifestwealthadvisory@gmail.com
Manifest Wealth Advisory 