Tax Planning

The best way to reduce the Income tax is to invest in the tax efficient products.

Saving Accounts – very low returns and tax inefficient – Keep the bare minimum amount in the saving account. (upto 40%)

Fixed Deposit  – Low returns (Currently – 6.5%) and tax Inefficient (upto 40% tax) – only suggested for investors with less than 5 lakhs of income

Bonds – Medium returns and tax inefficient (upto 40%) – not suggested

Debt Mutual Fund – Good return and tax efficient if invested for more than 3 years (20% with indexation benefit) – Invest in short term or long term fund as per the economic situations. Invest some amount in short term mutual fund for emergency.

Sukanya Samriddhi Yojana – Good return (currently – 8.4%) and highly tax efficient (No tax on Interest) – Invest for your girl child future.

PPF – Good return (currently – 7.9%) and highly tax efficient (No tax on Interest) – I will first invest in PPF before investing anywhere else. Invest only the funds which you don’t need before 15 years.

Equity Mutual Fund – Very good return and highly tax efficient (15% tax if sold within a year and 10% tax (only on capital gains more than 1 lac) if sold after one year) – Invest in the Large Caps as per the market situation – avoid when valuation multiples are high and invest when they are low. Invest only the funds which you don’t need before 3-5 years

NPS – Very good return and most tax efficient (effectively zero tax) – Invest in NPS before investing in Equity or Debt Mutual Fund. Invest only the amount which you don’t need before retirement.

Gold Bond – good return and tax efficient (interest income taxable but not tax on capital gains at the time of redemption) – better buy gold bond than investing in physical gold. Gold Bonds currently give 2.5% interest + appreciation.

Shares – good returns and highly tax efficient (15% tax if sold within a year and 10% tax (only on capital gain more than 1 lac) if sold after one year.

Senior Citizen who don’t have income from other sources should invest in first Senior Citizen Saving Scheme of Post Office (Current interest – 8.6%, Max 15 lacs), then buy LIC  PM Yaya Vandna Yojna (Current interest – 8.3%, Max 15 lacs), then Post office MIS scheme (Current Interest – 7.6%, Max – 4.5 lakhs).

Investors who have a girl child below 10 years of age should open Sukanya Samridhi account and should deposit first in it before investing in PPF account. Sukanya Samridhi account give 0.5% higher returns (Currently – 8.4%) than PPF

Deduction u/s 80C

Under this section a person can claim deduction upto total ₹2,00,000 from his Gross Total Income if he invest in certain schemes.
I recommend the below mentioned investments –

  • Sukanya Samriddhi Yojana (SSY) – For a person having a Girl Child upto 10 years of age, invest ₹1,50,000 here.
  • Public Provident Fund (PPF) – For a person not having a Girl Child, invest ₹1,50,000 here.
  • National Pension Scheme (NPS) – Invest additional ₹50,000 here.