Navigating the complex landscape of taxes and investments requires strategic planning. In the long run, it will optimise returns while minimising tax liabilities. In today's financial environment, where every rupee counts, employing tax-efficient investment strategies is vital for investors seeking to grow their portfolios.
Investing in tax-efficient investments will leave you reaping benefits — like reducing your tax burdens. Since investment returns are taxable, making your investments tax-efficient will add more value to your investment.
As an investor, it’s crucial to ensure that your post-tax returns are high. When choosing tax-saving investment options, it is essential to consider factors like investment horizon (how long you wish to hold on to an investment), risk tolerance (high risk goes hand-in-hand with high returns), liquidity requirements (how quickly it can be converted to liquid cash without losing a lot of value), and overall financial goals.
So, let’s dive into some tax investment strategies, perfect for all taxpayers, that can help you lower your tax liability.
Investing in ELSS funds will provide you with capital appreciation and reduce your taxable income by up to ₹1.5 lakhs. With a lock-in period of 3 years, which is considered minimal when compared to other tax-saving instruments available in India, it can be used for wealth creation in the long run.
Quant Tax Plan
Kotak ELSS Tax Saver
DSP ELSS Tax Saver
Mirae Asset ELSS Tax Saver
To leverage the favourable tax rate of long-term capital gains (LTCG) at 10%, it’s advisable to sell the shares/Mutual Fund equities after one year.
When selling shares or equity-oriented Mutual Funds after holding them for over a year, you become subject to LTCG tax. LTCG on equity investments exceeding ₹1 lakh in a financial year incurs a flat 10% taxation. Notably, any gains below ₹1 lakh in a financial year remain exempt from taxation. Short-term capital gains for the same is at 15%.
Example:
Imagine you invested ₹5,00,000 in Mahindra (M&M) shares. You bought 381 shares of M&M at ₹1,314 and sold those shares at ₹1,850. Here, we assume the buying and selling prices are the same to understand better the difference between LTCG & STCG paid.
Scenario 1
Scenario 2
Medical insurance covers your medical expenses and helps save up to ₹50,000 on tax. Your contribution to medical insurance premiums is exempt from tax per Section 80D of the Income Tax Act.
Diversification across different asset classes to save tax will add more benefits. Equity investments provide significant returns, whereas debt instruments like tax-free bonds and Fixed Deposits provide fixed and stable returns over time.
If you choose a growth option over a dividend option, you only have to pay LTCG when you sell the units & not when you receive the dividends.
Example: Suppose you invested ₹1 lakh in the dividend distribution plan of an Equity Mutual Fund scheme when its NAV was ₹10. You also invested ₹1 lakh in the growth plan of the same scheme when its NAV was ₹10. Here is how their returns will differ after one year.
Returns from dividends received are added to your income and taxed as per your tax slab. So, if you fall under the 30% tax slab, you will lose 30% of the dividend amount received. Hence, Mutual Funds with growth options are always more tax-efficient.
Tax loss harvesting is the offsetting of capital gains with capital losses, and it can lower your tax liability. It is the process of selling stocks to harvest losses and save on taxes.
If you sell your underperforming investments to realise the capital loss, these losses can be offset against the capital gain to reduce the tax liability.
As per section 54F, an investor can counteract long-term capital gains by purchasing or constructing a house within a limited timeline.
Take your capital gains (proceeds you earn by selling your capital assets like shares, gold, jewellery, bonds, etc.) and reinvest them by purchasing or constructing a house property.
Such returns earned, which are later reinvested on the sale of the capital asset, are allowed as an exemption from the Income Tax Act under Sec 54F.
When making tax-saving investment decisions, it is important to consider your financial objective as it will add more value to your portfolio. You can find more about it in our previous in-depth blog posts.
By implementing these strategies, you can maximise returns, reduce tax liabilities and achieve your financial objectives. Remember to incorporate tax planning into your investment strategy and consult financial advisors or tax experts for personalised guidance tailored to your financial circumstances and objectives.
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