July 12, 2024

Looking to diversify your investments and save tax? Here are some strategies.

Investing offers a path to not only expand your wealth but also strategically save on taxes. The mantra “don’t keep all your eggs in one basket” highlights the significance of diversification, while the tax laws provide avenues for optimising tax liabilities. Discussed here are some strategies to effectively diversify your investments while harnessing the potential for tax savings. 

Public provident fund (PPF) for steady returns 

Allocate a slice of your portfolio to the Public Provident Fund, known for its stable interest rates and tax-exempt returns. Further, investments in the PPF enable deductions under Section 80C.

For instance, Meera embraced the PPF as a secure investment avenue. Beyond relishing the government-backed assurance, she reaped tax-free interest and deductions under Section 80C, enhancing her financial foothold.

Equity mutual funds for long-term growth 

Step into the vertical of equity mutual funds, where pooled resources fuel investments in a diversified array of stocks. Beyond potential returns, these funds offer tax advantages. Holding equity funds for over a year grants eligibility for long-term capital gains tax with indexation benefits.

For instance, Rohan ventured into equity mutual funds, securing impressive returns over time. Given his holding period exceeded a year, he enjoyed the long-term capital gains tax rate of 10% (plus applicable surcharge and cess), coupled with indexation benefits.

National pension system (NPS) for retirement planning 

Secure your post-retirement phase by enrolling in the NPS. This platform facilitates a blend of equity and debt investments, while also rendering tax perks. Contributions to the NPS qualify for deductions under Section 80 CCD (1B).

For instance, Ajay recognised the value of early retirement planning and embraced the NPS. Through this diversified approach, he not only accessed tax benefits but also earmarked contributions under Section 80 CCD (1B), strategically trimming his taxable income.

Unit linked insurance plans (ULIPs) for insurance and investment

Forge a two-pronged strategy with ULIPs, offering life coverage and investments. While the investment component varies, ULIPs provide tax benefits under Section 80C.

For instance, Vikram harnessed ULIPs as a means to safeguard his family’s future while simultaneously growing his wealth. The dual advantage of insurance coverage and tax benefits played a pivotal role in his financial planning.

Tax-saving fixed deposits (FDs) for stability 

Diversify your investment portfolio by opting for tax-saving fixed deposits. These provide a balance between steady returns and tax efficiency. The investment tenure is five years, and the interest earned is subject to tax.

For instance, Priya expanded her investments with tax-saving FDs, relishing the stability they brought. Although the interest earned was taxable as per income tax slab, the overall arrangement enhanced her financial security while meeting her tax-saving goals.

Sovereign gold bonds for precious returns 

Diversify your investments by delving into sovereign gold bonds, which offer the allure of gold coupled with regular interest payments. These bonds enjoy long-term capital gains tax benefits after eight years.

For instance, Kavita chose sovereign gold bonds to expand her investment horizon to precious metals. The bond’s unique feature of offering both gold exposure and interest payments, along with the potential for tax savings, aligned seamlessly with her goals.

Dividend stocks for regular income 

Incorporate dividend stocks into your investment repertoire for a consistent income stream. These stocks not only offer dividends but also qualify for lower dividend distribution tax rates for individual investors.

For instance, Neha strategised her investments to include dividend stocks, enjoying a steady income from her portfolio. The advantage of lower dividend distribution tax rates enhanced her after-tax returns.

REITs or real estate investment trusts for property exposure 

Research REITs to diversify your holdings in real estate without the stress of becoming a property owner. REITs provide dividends and capital appreciation, along with potential tax efficiency.

For instance, Arjun ventured into REITs to tap into the real estate market’s potential without the complexities of direct ownership. The dividends and potential capital appreciation, coupled with tax-efficient gains, enriched his investment landscape.

National savings certificate (NSC) for fixed returns 

Consider the National Savings Certificate (NSC) to diversify your investments with fixed returns. NSC investments qualify for deductions under Section 80C.

For instance, Deepika diversified her portfolio with NSCs, appreciating the guaranteed returns they offered. The deductions under Section 80C further enhanced the appeal of this investment avenue.

ELSS for equity-linked tax savings 

Invest in equity-linked savings schemes (ELSS) to combine tax savings with equity growth potential. ELSS investments are eligible for deductions under Section 80C.

For instance, Rahul opted for ELSS as a dynamic approach to tax-saving investments. The scheme’s equity exposure, coupled with deductions under Section 80C, aligned perfectly with his financial aspirations.

Voluntary provident fund (VPF) for maximised savings

Extend your Provident Fund contributions with the Voluntary Provident Fund (VPF). While it mirrors the EPF, VPF allows you to contribute more and enjoy tax benefits.

For instance, Aarav leveraged the VPF to boost his retirement corpus. By contributing additional funds, he not only enhanced his savings but also harnessed the tax benefits aligned with his long-term goals.

Systematic investment plan (SIP) for regular investing 

Adopt systematic investment plans (SIPs) to instill discipline in your investment approach. SIPs allow you to invest smaller amounts at regular intervals, enabling rupee-cost averaging.

For instance, Ankit adopted SIPs to cultivate a systematic investment habit. This approach smoothed out market fluctuations and presented him with an opportunity to optimise his long-term returns.

Fixed maturity plans (FMPs) for fixed income 

Diversify your investments with Fixed Maturity Plans (FMPs), offering fixed income over a specific period. FMPs provide indexation benefits on capital gains, reducing tax liabilities.

For instance, Sunita opted for FMPs as a means to balance her portfolio with fixed-income instruments. The indexation benefits on capital gains allowed her to optimise her tax obligations.

These are just a handful of strategies that uncover the potential of diversifying investments while optimising tax savings. Remember, every individual’s financial journey is unique, and it is essential to align these strategies with your specific goals, risk tolerance, and aspirations. As you start on this journey, the synergy between diversification and tax planning will sculpt a strong financial foundation, nurturing your wealth and aspirations for years to come.

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