Indian financial year starts from 1st April and ends on 31st March. Many people do not plan their tax savings for the entire year and finally in March when the financial year is about to close, they start looking for options to save tax.
While it is important to invest money, it is equally important to save money. And one option to save money is by reducing the income tax liabilities. Do you know that if your income is above 10 lakh then you can save Rs 46,800 with just 1 tax saving option? Likewise, anyone with an income of more than 5 lakh would have to pay tax. So it is important to understand various options of tax saving. One of the most popular options is tax saving under section 80C where you can reduce your taxable income up to 1.5 lakh. There are few more options to save tax. But in this article, we will only consider the tax saving under section 80c.
First of all, this is not the right approach to plan tax savings in the last month of the financial year. You should start your tax planning well in advance right from the 1st month of the new financial year. This article is for those who are still looking for tax savings and also for those who want to save tax for the next financial year.
This article is divided into three sections:
In the 1st part, we will discuss, the 5 best options to save tax under section 80C.
In the 2nd part, we will understand the ELSS mutual fund category for tax saving.
In the 3rd part, I will mention the top 3 ELSS mutual funds for tax saving.
A. High-level option of tax saving under 80C
1. Tax saving FD:
These are special FDs that fall under the tax-saving category where you get a fixed annual interest without any volatility in your return. However, the returns are very low in the range of 5% to 6% depending upon the bank. Moreover, there is a lock-in period of 5 years which means you can’t take out money till 5 years from the date of deposit. Interest earned is taxable. It means if you invest in a tax-saving FD at 6% annual interest and if you fall under the 30% tax bracket, then your effective return post-tax would be just 4.2%.
2. PPF (Public Provident Fund) and EPF
PPF provides an interest of 7.1% as of Mar 2021. Its benefit is that your interest earned on the investment is also exempted. For example, if you invested Rs 1 lakh and earned Rs 7,100 with a 7.1% interest rate, you don’t need to pay any tax on your income of Rs 7,100. In tax-saving FD, you have to pay the tax on interest.
And, when you withdraw the total amount, you don’t need to pay any tax on your withdrawal amount. So let’s say you invested in PF every year and built a corpus of Rs 50 lakh then this entire corpus is tax-free.
But, it has a lock-in period of 15 years which means you can’t take out money till 15 years but partial withdrawal is allowed after 7 years.
EPF is an employee provident fund and only available for employees. Currently, it has an interest rate of 8.5% per annum, and interest earned is tax-free after 5 years of service.
3. Repayment of home loan:
Principal from the home loan can be used for deduction up to 1.5 lakh under 80C. This deduction is also applicable to stamp fees, registration, and transfer expense. So if you have a home loan, you can use this option to save income tax up to 1.5 lakh.
4. NPS (National Pension Scheme):
This is an initiative from the Indian government to provide a pension for the unorganized sector and working professionals to provide a pension after retirement. It is a mix of debt and equity. The returns would vary in the range of 8%-12% based on various categories within NPS. Although there is a Lock-in period till retirement at the age of 60. Post-retirement, you can withdraw up to 60% of the money and the rest 40% would be given every month as pension. There is no tax interest and well no tax on the 60% withdrawal amount on retirement.The best part with NPS is the additional reduction in tax liability up to Rs 50k under 80CCD over and above 1.5 lakh under 80C.
B. ELSS (Equity Linked Saving Scheme)
ELSS is a category in mutual funds that provides the dual benefit of investment as well as tax saving under section 80C. This category invests mainly in large cap stocks.
There is a lock-in period of 3 years which is the lowest among all tax saving options.
The best part of ELSS is that returns are higher than fixed saving options like FD or PPF as the investment is in equity markets. Although, the returns are not fixed. However, in the long term, ELSS returns would be much better than fixed saving instruments.
And there is only a 10% tax on return from ELSS on capital gain above 1 lakh. For example, if you invested Rs 10 lakh and earned a profit of Rs 5 lakh then you need to pay 10% tax on profit above 1 lakh. In this case, the total profit is 5 lakh so 10% tax is on an additional 4 lakh. That would be Rs 40k.
C. Top 3 ELSS mutual fund
1. Mirae Asset Tax Saver : It has a fund size of Rs 6,350 Cr and expense ratio of 0.29% which is much lower than average expense ratio of 1.18% in this category. Please note that we are talking about direct plan and growth option for all 3 mutual funds. If we look at the one year return (As of 22nd March 2020), Mirae Asset Tax Saver has given 88% return whereas its benchmark S&P BSE 500 TRI has given a return of 84% return. Clearly, Mirae Asset Tax Saver fund has easily betan the benchmark. Please note that the high return is due to fall in market during COVID in March 2020 and then it recovered later. 3 year average return is 17% as compared to benchmark average return of 13%. 5 year average return is 21.4% as compared to benchmark average return of 15.9%. So Mirae Emerging bluechip fund has consistently beaten the benchmark over the last 5 years. Its top holding include HDFC Bank, Infosys, ICICI and Axis bank. It has 69.7% allocation in large cap, 21.6% in mid cap and 8.3% in small cap. If we look at the top allocation by sector, 38.5% is in financial sector, 11.36% in technology, 9.2% in energy sector and 7.16% in healthcare sector.
2. Axis Long Term Equity Fund: It has a fund size of Rs 27,216 Cr and an expense ratio of 0.72% which is lower than the average expense ratio of 1.18% in this category. If we look at the one-year return (As of 22nd March 2020), Axis Long Term Equity Fund has given a 62% return whereas its benchmark S&P BSE 500 TRI has given a return of 84% return. So in 1 year, this fund is not able to beat the benchmark. The 3-year average return is 16.5% as compared to the benchmark average return of 13%. The 5-year average return is 17.6% as compared to the benchmark average return of 15.9%. So Axis Long Term Equity Fund has consistently beaten the benchmark over the last 5 years. Its top holding includes Bajaj Finance, Avenue Supermart, Info Edge, and Avenue supermart. It has 83.87% allocation in large-cap, 13.82% in mid-cap, and 1.7% in small-cap. If we look at the top allocation by sector, 36.1% is in the financial sector, 15.3% in services, 10.9% in the technology sector, and 9.8% in the auto sector.
3. Canara Robeco Equity Tax Saver: It has a fund size of Rs 1,724 Cr and an expense ratio of 1.06% which is similar to the average expense ratio of 1.18% in this category. If we look at the one-year return (As of 22nd March 2020), Canara Robeco Equity Tax Saver has given an 81.9% return whereas its benchmark S&P BSE 500 TRI has given a return of 84% return. So in 1 year, this fund is not able to beat the benchmark. The 3-year average return is 19.5% as compared to the benchmark average return of 13%. The 5-year average return is 18.7% as compared to the benchmark average return of 15.9%. So Canara Robeco Equity Tax Saver has consistently beaten the benchmark over the last 5 years. Its top holding includes ICICI Bank, Infosys, SBI, and HDFC Bank. It has 69.3% allocation in large-cap, 27.3% in mid-cap and 1.5% in small-cap. If we look at the top allocation by sector, 36.95% is in the financial sector, 16.3% in technology, 8.2% in the automobile sector, and 7.8% in the construction sector. Conclusion
So this is my list of the top 3 ELSS funds. Please note that there are 2 options of income tax slab. The above discussion on tax saving is applicable only if you opt for the old tax slab. If you opt for a new income tax slab, it has lower tax rates but you can’t reduce your taxable income with investments. So you need to take a call if you want to go with an old tax slab or a new tax slab. In the majority of the cases, people will end up saving more tax with the old tax slab as compared to the new tax slab. Those who are planning to invest for the next financial year should better make a SIP in an ELSS fund where a specific amount of money would be deducted every month.
PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".
Disclaimer: This article is only for educational purposes. Consult your financial advisor before investing your money.
Launch your Graphy