Tax Saving Investments: Highest Return & Risky
Tax season for 2015-2016 has arrived and now it’s time to submit investment proof. Under section 80C of income tax act, the exemption limit is Rs. 1, 50, 000. Investing this amount every year helps in avoiding the tax payment.
And this article is for those, who haven’t yet made any investments in order to save income tax. If you delay in submitting the investment proof then be ready to get your salary slashed for the month of Jan’16, Feb’16 and Mar’16. There are various tax saving instruments either zero risk with guaranteed returns and high risk, high return.
Here are the two tax saving investment products offering high returns but are risky.
- ELSS: Equity linked savings scheme (ELSS) also called as tax saving mutual fund. Under ELSS, the funds are invested in equities which has potential for higher returns but equities comes with risk as they are linked to various external factors such as economy, weather and many others. What sets apart ELSS from all other investment products is the lock-in period which is just 3 years. And this doen’t mean that the minimum investment required is high. It is actually just Rs. 500. Also the dividend and capital gains are exempted from tax and investment too does not carry any tax, which is very good. However in the long run investors can expect return of 14%-15%. ELSS are open ended equity mutual funds and a carefully chosen fund will grow your money and also save taxes. Investing in wrong fund will erode your returns.
- ULIP: Unit linked insurance plans or ULIPs offers life cover in addition to returns i.e. they are insurance cum investment product. However the returns are linked to the market and calculating returns is not possible even if past performance is known. Since stock market is highly volatile in nature and amid fears of global recession in 2016, investors need to be very careful in choosing ULIPs which are offered by life insurance companies. Also the premium amount is fixed and carries a lock-in period which is minimum 5 years. However there are various charge involved such as – premium allocation, administration, switching from one fund to another, mortality cover, and surrender value and fund management. So if you compare traditional insurance cum investment life policy to ULIP then later overpowers as the returns are higher. Another advantage of ULIP is that a free look-in period of 15 days is offered during which investors can return the policy. And this does not carry any penalty.
Both ELSS and ULIPs have one thing in common and that is they are linked to the market. And equity returns is a sureshot way to beat inflation compared to zero risk tax saving investment products. And if only continued for a longer term, the returns are worth.