Typically, investors mostly think of tax saving instruments during last quarter of financial year and finally end up making financial mistakes.
Conservative investors invest in insurance, Tax Saver FD,PPF instruments. But if your investment is to create wealth for your retirement, you have to invest in an instrument which gives you inflation adjusted returns and also helps build your wealth.
National Pension Scheme and ELSS would come under such investment objectives. ELSS is equity diversified mutual fund which benefits from capital appreciation and tax free dividends. It has a lock-in period of 3 years. NPS plans for your retirement and although it provides additional an income tax benefit of 50000 Rs it has many disadvantages. On retirement at the age of 60, you have to buy an annuity of around 40% of your corpus. You can withdraw the rest of the money, but it will be considered as taxable income and tax will be deducted as per the Income Tax slab applicable to you. If you are withdrawing the money before the age of 60 years, you have to use at least 80 per cent of the money to buy an annuity. Rest of the money, would be taxed as per your Income Tax slab.
In case of ELSS the income is tax free as long term capital gains on equity are tax free after 1 year .You need not redeem the amount after the lock in period. You can continue and hold the investment for your retirement. The potential in terms of returns is higher in ELSS as major allocation is in Equity asset class when compared to NPS which has a cap of 50% on equity instruments. Do not wait till the year end start for investments. Start investing through an Systematic Investment Planning (SIP) which would benefit from volatility of markets.
ELSS would be the best tax saving instrument for young investors. Plan for your goals and start saving. Ask for suggestions from a financial expert before you start investing. Investing for only tax saving would merely end up in wrong investments.
