Top 5 ways to make money by saving tax

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Top 5 ways to make money by saving tax

Top 5 ways to make money by saving tax : Tax – a word hated by all and sundry. The reason primarily being that it represents a kind of unavoidable expenditure which is associated with any form of income. So while earning money brings joy, the tax liability associated with it brings sorrow. The average middle class man finds himself in a sticky position as far as his tax liability goes. Individuals in the higher tax slab (30% tax slab) also hate paying out a good proportion of their earnings in taxation. So the solution provided by the government to bring some form of relief to the taxpaying individuals is the various avenues of tax-free investments which lower the taxable income and thus the tax liability.

Talking about tax-free investments, the options are many. There are a lot of products in the market to suit specific needs of different investors. In fact, with such a wide variety of options, an average investor gets baffled as to which one would be the best for him. The investment options differ in respect of the tenure, returns, flexibility, charge structure and impact of tax on the returns generated with the latter being the most important factor. Investments made are generally tax- free but the returns yielded may be tax-free or taxable at the individual’s tax slab. Thus, investors generally seek out the avenue which will yield tax-free returns or endeavor to channel their investments in a way that the tax liability on the returns generated is either minimum or nil. So, let us take a look at the top 5 ways by which an individual can make money and also save tax.

  1. Investing in a good ELSS – Equity Linked Saving Schemes (ELSS) are currently the most hot-selling investment product. The reason is the high return they generate; short lock-in period and the returns are tax-free. The ELSS schemes invest in equity markets and the returns follow the trend of the stock market. Thus the returns are linked to the effect of inflation on the economy and aim at wealth maximization.
  2. Opening a PPF Account – the Public Provident Fund (PPF) scheme is another great option for investors for building their retirement corpus. The returns are guaranteed @8.7% compounded yearly and are also tax-free. Moreover, the PPF Account offers flexibility in the form of withdrawal and loan options. Withdrawals are allowed after 7 years limited to 50% of the available balance at the end of 4 years or the immediate preceding year (whichever is lower) and a maximum of 25% of the preceding years’ balance can be availed as loan from the 3rd year till the 6th The tenure is for 15 years and thereafter can be increased in 5 year blocks. Though the period is a bit long, the compounding interest results in a considerable corpus which is also tax-free.
  3. Buying a ULIP – insurance premiums paid and the maturity proceeds are both tax-free. This makes insurance products another attractive investment avenue. While traditional products lack flexibility and the growth is not related to inflation trends, ULIPs overcome these problems and appeal to the return-loving investors. With the new low-charge structure as mandated by SEBI, these products have become more customer-friendly. ULIPs offer the dual feature of a mutual fund and life insurance and thus feature in my top 5 list.
  4. Investing money in the name of wife or child – gifting money to your wife or child is legal and investing it on their behalf, i.e. in their name could save tax. The earnings would be added to your income but if the income is reinvested, the income would be held in their name and would be tax-free.
  5. Investing in Gold ETFs or Debt Funds – Gold ETFs and Debt Funds are another attractive option because they offer the benefit of indexation at the time of maturity. On maturity, the returns are taxable under the heading Income from Capital Gains but due to the indexation feature, which follows the trend of inflation, the returns when indexed would restrict the tax liability to a bare minimum which may even become zero in certain cases.

Here is the comparative analysis of the top 5 options:

Top 5 ways to make money by saving tax

Top 5 ways to make money by saving tax

Thus, these options ensure the investor of minimizing their tax liability on their investments. With the current budget increasing the 80C limit to Rs.150,000 from Rs.100,000, the average investor has all the more reason to enjoy the benefits of these investments. So, go ahead, invest and enjoy low or tax-free returns.

Top 5 ways to make money by saving tax : Top 5 ways to make money by saving tax : Top 5 ways to make money by saving tax

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