Tax-Efficient Investing: A Beginner’s Guide for 2024 in India

Every investment invariably comes with associated costs such as commissions, management fees, administrative expenses, and, notably, taxes. Among these, taxes often take the largest share of your investment returns. 

However, there’s a silver lining: through tax-efficient investing, you can reduce your tax liabilities and boost your net earnings, whether your goal is retirement savings or immediate income generation.

Importance of Tax-Efficient Investing 

The importance of tax-efficient investing cannot be overstated. While investment choices and how you allocate your assets are crucial for returns, reducing the tax hit you take is equally important for long-term financial gain.

This significance lies in two fundamental truths:

1. The taxes you pay are funds no longer available for investment.
2. You also lose out on the potential earnings that the taxed amount could have produced if it remained invested.

The after-tax returns truly count, as these are the funds available for your use now and during retirement. To maximise your investment returns and retain more of your earnings, embracing tax-efficient strategies is essential.

Understanding Tax Implications in India

Understanding tax implications is essential before exploring tax-saving strategies in India’s investment landscape.

Long-Term Capital Gains (LTCG) Tax: When equity shares or equity-oriented mutual funds are sold after being held for more than a year, LTCG tax is applicable. Gains exceeding ₹1 lakh in a financial year are taxed at 10%, while gains under ₹1 lakh are exempt from tax.

Short-Term Capital Gains (STCG) Tax: Profits from the sale of equity investments within a year are considered short-term capital gains. These are taxed according to the investor’s income tax slab rate.

Dividend Tax: After 1st April 2020, dividend income from stocks is taxed in the hands of investors, as companies no longer pay Dividend Distribution Tax (DDT). Dividend income over a specific limit is taxable, with a 10% TDS applicable if the total dividend exceeds ₹5,000.

Tax-Efficient Investment Strategies in India

1. Maximising Long-Term Capital Gains (LTCG) Tax Benefits: By retaining equity shares or equity-oriented mutual funds for over a year, investors can benefit from the favourable LTCG tax rate of 10% on gains exceeding ₹1 lakh. This threshold provides a tax-efficient approach for realising profits. Regularly review your portfolio to ensure that equity investments are aligned with the one-year holding criterion, thereby optimising the tax impact on potential gains.

• Investing in Equity-Linked Savings Schemes (ELSS): Investments in ELSS are eligible for tax deductions up to ₹1.5 lakh annually, which can significantly reduce taxable income. Besides the tax advantage, ELSS funds also offer the potential for higher returns over the long term due to their equity orientation, making them suitable for wealth creation.

1. Systematic Investment Plans (SIPs) in Equity Mutual Funds: Regular investments through SIPs help in averaging out the cost of purchase, reducing the impact of market volatility. Gains up to ₹1 lakh per annum from equity investments are exempt from LTCG tax. Strategically planning withdrawals from SIPs can help keep gains within this exempted limit.
2. Tax-Efficient Asset Allocation: A balanced portfolio combining equities and debt instruments can optimise the tax burden. While equities offer growth potential, debt instruments like bonds and fixed deposits can provide stable income with favourable tax treatment, especially for short-term gains. 

Investments in certain debt instruments like PPF and tax-saving fixed deposits can yield tax benefits. Balancing these with equities can provide both tax efficiency and portfolio diversification.

Tax-Efficient Investment Options in India

1. Equity-Linked Savings Scheme Funds: ELSS Mutual Funds invest in equities, providing potential capital appreciation with tax benefits. Investments qualify for Section 80C deductions, and gains are treated as long-term capital gains, taxed at 10% for gains above ₹1 lakh annually. Dividends are taxed in the investor’s hands, and ELSS funds can be invested in through SIPs, each with a 3-year lock-in period.
2. Public Provident Fund: PPF is another long-term investment option by the Indian Government, featuring a 15-year lock-in period. PPF investments fall under the Exempt-Exempt-Exempt (EEE) category, meaning the investment, interest, and maturity amount are all tax-free. Annual investments up to ₹1.5 lakhs qualify for Section 80C deductions, and the interest and maturity proceeds are tax-exempt.
3. Employee Provident Fund: EPF is focused on retirement benefits for employees, offering tax exemptions on employee contributions under Section 80C up to ₹1.5 lakhs per financial year. The EPF falls under the EEE category, with tax-free interest and withdrawals after 5 years of service. Employer contributions are also tax-exempt.
4. Senior Citizen Savings Scheme: Tailored for individuals aged 60 and above, provides a reliable investment option with attractive interest rates. SCSS contributions qualify for Section 80C deductions up to ₹1.5 lakhs annually, and interest earnings up to ₹50,000 are exempt from TDS. The maturity amount is also tax-free.
5. National Pension Scheme: NPS encourages retirement savings, offering tax deductions on contributions under Section 80C, with an additional deduction for voluntary contributions under Section 80 CCD(1B) up to ₹50,000. Employer contributions are tax-exempt under Section 80 CCD(2). Partial withdrawals are tax-free, and up to 60% of the corpus can be withdrawn tax-free upon retirement.
6. National Savings Certificate: NSC  is a secure long-term investment option with tax benefits under Section 80C. Interest earned is tax-free for the first four years and taxable thereafter, with no TDS deducted at source.
7. Fixed Deposits: Tax-Saver Fixed Deposits (FDs), with a 5-year lock-in, offer tax deductions under Section 80C up to ₹1.5 lakhs. The interest is taxable according to the investor’s income tax slab, with no TDS deducted up to ₹40,000 (₹50,000 for senior citizens).
8. Sukanya Samriddhi Yojana (SSY): This is a government-sponsored savings program designed to encourage saving for the future expenses of a girl child, such as education and marriage. As part of the ‘Beti Bachao Beti Padhao’ campaign, SSY offers tax deductions under Section 80C of up to ₹1.5 lakhs annually, and the interest income is tax-exempt under Section 10(1D).

Start Investing 

Tax-efficient investing plays a crucial role in effective financial planning, especially in India’s growing market environment. Utilising these strategies and keeping abreast of tax laws allows you to enhance your returns, achieve your financial goals, and minimise tax burdens.

 It’s important to integrate tax considerations into your investment approach and seek advice from financial advisors or tax professionals for customised recommendations that suit your specific financial situation. With Angel One, you can invest in ELSS funds with a direct plan to start with your tax-efficient investment journey. So what you’re waiting for? Open your demat account with Angel One to start investing today and save on your hard-earned money.

Disclaimer: This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.