The beginning of a new calendar year is typically when salaried employees receive a request from their employers for submitting their tax-saving investment proofs. This adds momentum to tax-saving investments during the January to March period of each year which also marks the end of the financial year. People opting for the old tax regime actively seek tax-saving investment avenues to reduce their tax liabilities. From traditional fixed deposits and public provident funds to market-linked products like Equity Linked Savings Scheme (ELSS) and National Pension System (NPS), investors have a wide range of tax-saving options to choose from.
Although many people make tax-saving investments between January and March, but that is not ideal. It’s better to start investing at the beginning of the fiscal year. This allows for better planning, adequate savings, and prevents hasty investments in unsuitable instruments just for tax benefits.
In this story, we take a deep dive into Equity Linked Savings Scheme or ELSS funds and how investors could invest in them to not only save taxes but also potentially build a corpus for their future goals.
Also Read: Retirement Planning for Women: How to take control of your financial future
Let us begin by understanding the two available personal tax regimes in India. There are two tax regimes – the old tax regime and the new tax regime, and investors can select their preferred tax regime while filing taxes. The old tax regime is charactered by relatively higher tax rates but taxpayers can save taxes by investing in approved investments and reduce their tax liability. The new tax regime was introduced in the year 2020 and is characterised by relatively lower tax rates for each income slab but without any deductions on taxable income.
Taxpayers can compare their tax liabilities under both regimes and choose the regime most suitable to them. Till the end of July 2024, about 72% of taxpayers had opted for the new tax regime while 28% continued to be in the old tax regime. The new tax regime is also the default tax regime. Hence, if a taxpayer does not choose the preferred tax regime, the new tax regime is applicable by default.
“Each avenue of tax saving under the old regime has its own characteristics and taxpayers can select the avenues which aligns with their risk appetite and investment horizon.
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