Every year we reluctantly invest a part of our income in some or the other saving instruments only to save tax. Everyone wants a high return with high liquidity at the least possible risk. But most of the tax saving instruments are illiquid and tend to give lesser return than the market
The instruments eligible for tax saving are -
1. Premium for Life Insurance or ULIP
2. Provident Fund (PF) contribution
3. Public Provident Fund (PPF) - only up to Rs. 70,000 in a year
4. Repayment of home loan principal
5. Equity Linked Savings Schemes (ELSS) of Mutual Fund Companies
6. Infrastructure Bonds
7. National Savings Certificates (NSC)
8. Tax Saving Fixed Deposits with Banks
9. Tuition Fees of children
Most of the above do not have liquidity and have a minimum lock in period of 3 years. Amongst all the schemes, ELSS enjoys a comparative advantage. Most of the ELSS schemes have two plans - growth and dividend. In growth there is no payment in between and the entire sum is available only after the end of the lock in period which is generally 3 years. On the other hand in dividend plan, dividends are paid even during the lock in period. Investors can use this to get tax benefits for more amount by investing lesser amount.
Lets take an example. Suppose there is a ELSS in the market with NAV of Rs. 125 and is expected to payout a dividend of 20%, next month. So by investing Rs. 1 lac in this ELSS you get 800 units. When the company pays out dividend next month you get back 800 x 20 = 16,000. So your actual investment is only 84,000(100,000 - 16,000) and you get tax benefits of 1 lac as per Section 80 C.
For investing minimum one needs to keep a track of the performance of the fund and get information on the timing and the amount of the next dividend. Based on these information one can take a sound decision as to when and where to invest to get back the maximum part of invested amount as dividends.
