If you are looking to start investing your money to save taxes or create wealth, whatever the goal, there are so many investment options out there that they end up confusing you than helping you. Today we’ll discuss the most overlooked aspect of choosing an investment.
Mutual funds sales agents would have you believe that rate of return should be the principal deciding factor about which investment you choose to go with. Your father — your trusted and perhaps your only financial advisor — will tell you that FDs are the safest bet, no matter what.
Ranjan decided to cut back his tax outgo in 2014 and chose to go with 5-year fixed deposits. He already had regular fixed deposits running and didn’t want to take any chances with his money. Investments made under 5-Year fixed deposits can be claimed as a deduction under Section 80C.
Read more about how Section 80C can reduce your taxable income here.
But here’s what he missed – only the principal and investment is not taxed, but the interest earned is fully taxable.
Read more about paying taxes on interest income here.
Had he known better he would have chosen investments that were wholly tax-free. This arrangement is called an EEE model, where the investment is allowed as a deduction, dividends/interest earned/paid are exempt from tax and you are also not taxed at the time of withdrawal.
What are the investment options that are completely tax-free?
- Equity-linked savings scheme
- Public Provident Fund
- Sukanya Samridhi Acccount
What are the investments where the interest is taxable?
- Senior savings citizen scheme
- 5-Year Fixed Deposits
- National Savings Certificate
What are the investments that are taxable at the time of withdrawal?
- Unit-linked Insurance Plan
- National Pension Scheme
Be sure to consider tax treatment of the money earned and invested before you zero in on the right investment for you.
As always, write to firstname.lastname@example.org if you have any questions related to income tax return e-filing.