According to Section 80C of the Income Tax Act, you can save taxes up to Rs.1.5 Lakh by investing in Equity Linked Savings Scheme(ELSS)mutual funds. It is a good idea to consider ELSS over traditional tax saving investments, because they have the lowest lock-in period and can give you returns over and above inflation. ELSS funds are equity-based high-return mutual funds. However, before investing in these funds, you may want to calculate your tax saving amount.
Here are some steps to help you calculate your tax saving requirement:
- Calculate your exact taxable income
You can begin by computing your taxable income. For this, you may want to look at the various tax slabs. Different tax slabs have a different percentage of applicable taxes. However, you can only save Rs.1.5 Lakh from your taxable income. In case, your taxable income is below this amount, consider investing it in ELSS while continuing to invest in other goals.
- Consider deductions as well
You can avail deductions under Section 80C such as LTA (Leave Travel Allowance), medical expenses, child’s education expenses to help you calculate your exact taxable income. It can help to examine your payslip thoroughly, as well as Form 16, to know about these deductions. Further, if you have a home or an education loan, you can also receive tax benefits on them.
- SIP or Lump sum
Consider, you have followed the steps mentioned above and determined your exact taxable income. Your next step would be to choose between SIP (Systematic Investment Plan) or Lump sum for an ELSS investment.
You can opt for the SIP route if you wish to divide your tax saving investment into smaller SIP portions. However, for this, you can invest from the beginning of the financial year. In the SIP route, you can choose your frequency to invest in mutual funds. You can select a half-yearly, quarterly, monthly, weekly, or even a daily SIP.
Investing through the SIP method can help you benefit from cost averaging. This is because you invest during different market conditions. You can modify your SIP amount, or even stop your SIP in between without penalty.
You can also invest a lump sum amount in ELSS funds. However, choosing the SIP route is regarded as more beneficial for investors seeking regularity and cost averaging benefits on their investments.
- Seek Financial Advice
There are a variety of ELSS schemes offered by various AMCs (Asset Management Companies). Therefore, before you zero-in on any particular scheme, you may want to study the company’s profile, the fund’s past performance and its expected returns. You can do this on your own, or seek financial advice. It is better to seek professional financial advice because mutual fund advisors are market experts that can help you choose your right fund.
Before you invest in ELSS, you can also speak to your financial advisor regarding integrating your tax saving goal, with other financial goals.