The new year brings with itself a hustle around the income tax proof submissions compelling us to make last minute investments. Are you one of those who keeps the tax-saving investment pending till the last minute? Don’t worry, you are not alone. Although it is one of the most commonly followed practices, it is not necessarily profitable. It is mathematics. Now, let us assume that all investment tools provide a uniform rate of return. At the end of FY, if you have started investing in April your invested amount will earn that much more interest as compared to a last-minute January investment. This, simply because the period of investment is longer.
Hence, your best bet to save tax effectively this year is to start a SIP in an Equity Linked Savings Scheme (ELSS) mutual fund. Alternatively called, tax-saving mutual funds, ELSS funds are equity mutual funds that are deductible under the Section 80C of the Income Tax Act.
We would like to drive our point home with a few assumed scenarios here. The most popular alternative mode of saving tax is investing in PPF. So, let us compare the two options for better understanding.
SIP in ELSS starting Apr’18 Vs One-time investment in PPF in Jan’19
The scenario speaks for itself. Please note that although such a short span of time i.e. 12 months is not a plausible time period to consider when comparing investment returns, however, this is just to exhibit the difference. The difference increases as time does.
SIP in ELSS starting Apr’18 Vs Monthly PPF investment starting Apr’18
Your money grows faster in ELSS than it does in PPF.
Further to the above scenarios, the lock-in period in PPF is 15 years whereas for ELSS is 3 years, the lowest amongst all tax-saving instruments. There is a skewed perception that investors carry that says a tax-saving instrument will necessarily offer lower returns. But, as depicted in the illustrations above, that is clearly not true.
So, this coming financial year, let us spend some time with our money, decide on a SIP amount per month that suits our expenses and start a SIP in an ELSS fund.
WealthApp advisors would be keen to help you with tax-planning if needed. Come visit us to find out about the best ELSS funds to invest it.