Fri. Apr 19th, 2024
best tax free investment

Being an investor, you should definitely look for investment options that not just help you save tax but even produce tax-free income. While picking the right tax saver, among various other factors such as liquidity and safety, returns, make sure you understand how the returns are going to be taxed. If the income earned is taxable, the scope to make income over the long run gets constrained as taxes are going to eat into your returns.

In tax-saving financial products such as Senior Citizens’ Savings Scheme (SCSS), the National Savings Certificate (NSC), five-year time deposits with banks and post offices, the interest sum or amount gets added to your income and hence is liable to be entirely taxed.  So, even though these help you save tax for the present year, the interest income is going to be a tax liability each year till the end of your tenure.  You must take into consideration those taxable tax savers tools will help in saving the tax to a qualified limit both on investments and that on maturity. Since they come with tax benefits, the returns on these are probable to be under the market returns. Don’t lose your heart because if you think properly you can come across the best tax free investment options for you. below are given few such tax savers that not just help you save tax but also help you earn the tax-free income. But, not every one of these is the same in terms of features and asset-class. So to make the right choice is absolutely essential.

Equity Linked Saving schemes

Equity-linked savings schemes (ELSS) are expanded equity mutual funds with two differentiating features – one, investment sum in them qualifies for tax benefit under the Section 80C of the Income Tax Act, 1961, up to a restriction of Rs 1.5 lakh a year and secondly, the sum invested has lock-in duration of three years. Every mutual fund (MF) house caters them and generally uses the word tax-saving in its name to differentiate them from their other mutual fund schemes. The returns in the realm of ELSS are not fixed and neither assured but is reliant on the performance of equity markets.

You can opt for dividend or growth option in them. Though the former suits someone looking for a regular income, although not certain, the latter is suitable for someone looking to save for a long-term requirement.

However, dividend in an equity MF scheme (including ELSS) must not be construed as similar to that of the dividend received from an equity share. In the latter, the dividend is declared out of perks or profits produced by a company while in an MF, it is out of the NAV. For an MF unitholder, getting the dividend is just equal to the redemption of units.

However, dividend in an equity MF scheme (including ELSS) must not be interpreted as similar to the dividend received from an equity share. In the latter, the dividend is declared out of profits produced by a company while in an MF, it is just out of the NAV. For an MF unitholder, getting the dividend is merely equal to that of the redemption of units. Furthermore, the dividends in an equity scheme are presently are subject to dividend distribution tax of 10 percent. Hence, for a person who is investing in ELSS, choosing the growth option over dividend option is going to yield tax-effective returns.

To alleviate risks, one may diversify across more than one ELSS scheme (on the basis of market capitalization and industry exposure) after considering their long-term consistent performance. After the lock-in ends, a person can continue with the ELSS investments similar to that of any open-ended MF scheme. However, review its performance against its benchmark before doing so. Investing in ELSS not just helps you save for a long term goal but even helps you save tax and produce the tax-exempt income.

What is public Provident Fund?

For decades and even longer, Public Provident Fund (PPF) Scheme, 1968 has been a favorite and preferred savings avenue for several investors and is still standing tall. After all, the principal and the interest that is earned have a sovereign guarantee and the revenues are tax-free.PPF presently (subject to change every three months) caters eight percent per annum. For someone paying 31.2 percent tax (highest income slab), it does translate to nearly 11.62 percent taxable return. Now, how many taxable investments encompassing bank FD’s are catering such high pre-tax return!

You can easily open a PPF account in one’s own name or on behalf of a minor of whom he or she is the guardian. While the minimum annual amount needed to keep the account active is Rs 500, the maximum amount that can be deposited in a financial year is Rs 1.5 lakh. This is the joint restriction or limit of self and minor account.

For your information, PPF is a fifteen -year scheme, and it can be extended indefinitely in a block of five years. It can be opened in a chosen post office or a bank branch. It can also be opened or started online with few banks. One is permitted to transfer a PPF account from a post office to that of a bank or vice versa. A person of any age can start and open a PPF account. Even the ones with an EPF account can open up a PPF account.

PPF is suitable for investors who do not want volatility in returns similar to the equity asset class. However, for long-term aims and especially when the inflation-adjusted target sum is high, it is better to take equity exposure, rather through equity mutual funds, encompassing ELSS tax saving funds and not completely depend on PPF.


So, you can do the best tax saving once you figure out what is best for you as per your needs and incomes. You can always talk to professionals too before you start doing investment.  It is always better to do proper research before you do the investment.

By admin

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