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Tax planning must be an integral aspect of handling finances. Tax is a compulsory obligation which must be timely discharged to avoid any penalties or fines. Thus, assesses must start planning their taxes from the start of the financial year.The government also offers relaxations in the form of incomes exempted from tax and tax deductions in lieu of certain expenses and investments. Thus, the Income Tax Act, 1961 provides taxpayers with several investment options to reduce their taxable income .When it comes to selecting a tax-saving product, investors usually focus on factors like liquidity, ease of withdrawal and risk component, investment horizon. However, another equally crucial aspect of consideration is the post-tax returns of the investment. Let us explore this point in detail.
Tax Saving Investments
One of the most widely used methods to save tax is to make an investment qualifiable for deduction under section 80C of the Income Tax Act. These include investments in ELSS Funds , National Savings Certificate , Public Provident Fund , National Pension Scheme , Senior Citizen Savings Schemes, bank fixed deposits and many more. As per this section, taxpayers can claim deductions up to the limit of Rs. 1.5 lakh in a financial year.
EEE vs. EET vs. ETE
Technically, there are three stages that must be examined to understand the tax efficiency of an investment. Investors must determine whether their investment is taxable or not1. At the time of investment2. On the accrual of interest/dividend/other income3. At the time of maturity.
| EEE | EET | ETE |
| Exempt-Exempt-Exempt | Exempt-Exempt-Taxable | Exempt-Taxable-Exempt |
| Invest is exempt from tax at all three stages | Investment and income earned on investment are tax exempt. However, the matured sum or withdrawals are taxed in the hands of the investor | The amount invested is tax-free both at the time of investment and maturity. Income earned is however taxable. |
| Eg: Public Provident Fund and Employee’s Provident Fund. | Eg: National Pension Scheme | Eg: Bank Fixed Deposits |
Tax-saving instruments that enjoy the EEE status are the most sought after. However, investors must remember that in some cases, it may be beneficial to pay more tax and opt for higher returns instead of forgoing returns for reducing their tax liability.
How to Calculate Post Tax Returns?
Calculating the post-tax returns of an investment is no rocket science. There is a simple formula required to calculate post-tax returns. The formula for calculating post-tax returns is: Post-Tax Returns(%) = Pre-Tax Returns(1 - Effective Tax Rate) In Conclusion There is no universal rule thumb rule when it comes to selecting tax-saving instruments. Each taxpayer has a unique set of constraints and expectations that drive his or her preferences. Mainly, investors must keep in mind their effective tax rate and calculate their post-tax returns and not be blinded by attractive pre-tax figures.Ready to make the most of your money? Start your tax planning journey now!
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.