Index

How to save taxes outside 80c?

by Lalitha

While we always tend to focus on maximizing our tax savings using 80c, this section of the Income Tax Act helps us save taxes on 1 year’s income only. What about saving your tax outgo on savings from your hard work over multiple years? The answer lies in mutual funds.

Fixed Deposit (vs) Debt Funds

Let us say our investment horizon is 7 years. Rs.10 Lacs in FD at 8.5% interest p.a would fetch a post-tax return of 5.87% (considering the highest tax bracket of 30.9%). Crunching the numbers, your FD would earn Rs.7.1 Lacs interest in total, on which you would pay Rs.2.19 Lacs tax and be left with an accumulated sum of Rs.14.9 Lacs at the end of 7 years.

If you had invested the same Rs.10 Lacs in a debt fund with similar returns as an FD at 8.5% p.a, you would pay a tax of only Rs.1680 in all (0.22% tax against 30.9% in the case of FDs) and be left with Rs.17.78 Lacs at the end of 7 years. The significantly lower tax outgo is due to the indexation provisions available to capital assets, providing you with the twin benefits of incurring lower tax and growing your wealth by 20% or more when compared to a FD.

Fixed Deposit (vs) Equity Funds

If you had invested the same Rs.10 Lacs in an equity fund with returns of say 15% p.a and had remained invested for the same 7 year period, you would pay ZERO tax and be left with Rs.26.6 Lacs at the end of 7 years. Even if the fund had returned a lower 12% return, your returns at the end of 7 years would be Rs.22 Lacs, a whopping 47% more than your FD returns and 28% more than your debt fund returns. Of course, the higher returns comes with higher level of risk to be undertaken.

Fund selection

The above *illustrative* scenarios are presented for one to comprehend the tax advantages of investing in a suitable mutual fund. Do not use it blindly – as to what funds to invest in, when to invest, how long to stay invested, whether to go for lump-sum or SIP and all other questions that you may have, it is best to perform a detailed investment planning with your financial planner.

Although mutual funds comes with its own risks, there is a suitable fund to cater to everyone’s risk appetite and propensity. Perform a careful fund selection with your financial planner, get your tax savings worked out and make a sound investment decision – you are in to reap good returns in the long run.