Clueless about Taxes? Here’s our three-step guide to saving on taxes
There’s barely a week left for the end of the financial year in India and if you’re a salaried employee who’s eyes glaze over at the thought of taxes, this is the guide for you.
Quick overview:
In India, for something to be a tax-advantaged instrument under 80C usually means that you put your money into the instrument that is ‘locked-in’ for a period between 3 to 15 years. During this period, you cannot access your savings, but it earns interest or returns all this while. At the end of the lock-in period, you can either withdraw the amount or keep it invested (usually).
Here, we explore the easiest way for you to start saving on your taxes. This guide is meant for beginners and will provide a ‘quick and dirty’ solution to begin saving on your taxes. The intent is for this to be a start on your personal finance journey and not a one-stop shop for all your needs.
Example: For now, we’ll concentrate on the 80C instruments that allow you to reduce up to 1.5 lakhs per year from your salary. Essentially, whatever amount you choose to invest in these instruments will be reduced from your salary while calculating your taxable salary so, if you earn 6.5 lakhs between April 1st, 2018 and March 31st, 2019 and you put the maximum amount of 1.5 lakhs into an 80C instrument like a PPF account, then, for the purpose of calculating your taxes, your income will be assumed to be 5 lakhs only.
Step 1: Choose your situation
Now, while these are not the only 80C instruments available, I think these are the most convenient and quick instruments for millennials to use. Sure, there are schemes like the post office deposit schemes, but I doubt any one wants to stand in line at the post office to get their money in hand. As you learn more about your financial requirements, you may look into more exotic schemes like ULIPs etc.
Step 2: Open the account / perform your KYC requirements.
Step 3: Deposit as much money as you can (upto 1.5 lakhs) into these accounts before 31st March 2019 (to save taxes for the 2018–19 financial year).
Now, let’s learn a little bit about your chosen instruments:
1. Equity Linked Savings Scheme (ELSS): These are mutual funds that invest your money into the stock market. While the thought of your hard-earned money being lost in the stock market is a very real fear, mutual funds reduce this risk somewhat by investing in a large basket of stocks instead of betting on a handful of stocks. The fact is that over long periods of time, the stock market has generally given superior returns to every other asset class and the ELSS funds are the easiest way to access those returns. It also has one of the shortest lock-in periods of any tax-advantaged instrument: 3 years.
However, the things to be careful of here include:
a. Choosing the correct fund to invest in and staying invested despite the ups and down of the market.
b. Making sure to invest in direct funds only rather than regular funds which have lower returns. A platform like Kuvera or PayTM Money might be helpful since they only have direct funds.
c. You also need to complete your securities KYC through apps like PayTM Money or by personally going to a distributor like CAMS or Karvy’s offices.
2. Tax advantaged fixed deposits: These are fixed deposits offered by nearly every bank that will provide an assured sum with a guaranteed return at the end of five years. This is very useful if you have a concrete goal that is five years away and you don’t want to take any chances with the money for it (eg. buying an apartment etc).
Most banks allow you to open these FDs electronically without going to their branch. Be sure to check out the rates offered by different banks since they can differ significantly. However, its usually easiest to open an account in the bank that you already have accounts in.
3. Public Provident Fund (PPF): This is my personal favourite. It’s an instrument that allows you to lock away your savings for at least 15 years and provides a higher interest rate than most fixed deposits. You can be assured your money is safe because its guaranteed by the government of India. This is the account I’d recommend anyone who has no immediate requirement for their money and can afford to lock it up for a long time (eg. to save for their retirement etc.).
You can open a PPF account at most banks and its easiest to open one where you already have an account. You can also see the current and historical PPF returns on Wikipedia.
Step 4 (optional): Learn more about your personal financial goals and the investment options available to you. Keep following this blog where I’ll write about how to secure your financial future and enjoy your hard-earned money.
Disclaimer: Investment advice is highly personal and this is meant only to be an overview of some of the options available. The information provided is on an as-is basis and we assume no liability for any damages resulting from it. This guide is targeted at beginners and is neither exhaustive nor relevant to all investors. I’ve tried to ensure the correctness of the data as far as possible but do confirm the features of any instrument that you choose to invest in as well as any relevant changes in the Income Tax laws.
