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The best investment bankers around the world preach a straightforward rule – never place all your eggs in one basket!
Your financial portfolio under the existing Indian tax system should have a veritable mix of balanced and aggressive options that are made up of different kinds of short term and long term products.
An investment option that is less than five years is called a short-term investment. Short-term goals are usually set to meet emergency fund requirements or anticipated unavoidable expenses. For example, paying for your wedding or buying a luxury car in down the line. While the short term investments can offer you good returns, the last thing you want is for them to be taxed!
Particular investments are taxable under short term capital gains tax that can reduce the return on your investment.
So, if you are feeling lost amid a variety of investment options, then here are some that will help you choose the right set of investments that are geared towards wealth creation and helping you meet tour short term financial goals.
1. Rajiv Gandhi Equity Savings Scheme (RGESS)
Rajiv Gandhi Equity Savings Scheme, as the name suggests, is amongst many tax-saving investments that are ideal for investors in the domestic capital markets, under the prevalent Indian tax system. With a short lock-in period of 3 years and a fixed lock-in for the first year, this is an ideal short term investment. 50% amount invested in this scheme is eligible for tax deduction under section 80CCG, subject to a maximum investment of Rs. 50,000.
2. Debt-Based Mutual Funds
Debt-based mutual funds are also amongst popular tax saving Plan. These funds primarily invest in market instruments such as corporate bonds, government securities, and treasury bills.
This tax-efficient alternative to short term fixed deposits provide fixed returns. If you are a risk-averse investor, then this is the perfect short term investment option. A well-performing debt-based mutual fund can earn up to 7-8% post-tax return.
Unlike bank fixed deposits, debt-based mutual funds do not charge a premature withdrawal penalty from its investors. You can also get the indexation benefits if the unit is held for over a year.
The dividends are also earned tax-free. However, it is essential to note that if the debt investments, such as this one, are sold before a period of three years, then a short term capital gains tax applicable.
3. Equity Linked Saving Scheme (ELSS)
Equity Linked Saving Scheme is a mutual fund that invests in an equity market that offers tax benefits under section 80C of the Income Tax Act. With a short lock-in period of three years, this is one of the best tax saving investments.
Apart from the tax saving of up to 1.5L, ELSS are also exempt from long term capital gain tax of up to Rs. 1L a year. Therefore, ELSS offers better post-tax returns to you as an investor. It is also important to note that despite being a short term investment, short term capital gain tax does not apply to ELSS, and the capital gains are tax-free as well.
4. Equity Mutual Funds
Equity funds invest mainly in listed and unlisted shares and company equities. In the case of equity mutual funds, profits earned from capital gains are obtained when these investments are redeemed.
With regards to equity funds, short term capital gains are earned when the profits are received as a result of being redeemed or switched before completion of 1 year from the date of purchase. Additionally, it is also crucial to note that equity funds are subject to short term capital gains tax at the rate of 15% plus 4% cess.
5. Term Capital Gains and Dividends
When you earn dividends on mutual fund investments, then they are considered as profits from the investments. Therefore, short term capital gains tax is not applicable in this case. Any dividend earned from mutual fund investments, irrespective of equity or non-equity funds are not treated as capital gains; hence they are tax-free for you as an investor.
According to financial experts, when you are looking to invest in the short term, then post-tax returns should not be ignored. In the above investment options, the income earned is added to your total income in that financial year and is tax-liable as per the relevant income tax slab.
Tax saving investments require immense planning and strategy to create wealth in the short term. There are many short term investment plans from reputable insurers such as Max Life Insurance that empower you with valuable information so that you can choose the perfect instrument for your portfolio.
Use the online tools to compare, review, and assess the investment products before committing to them, even if it is for a few years!
