Tax-Saving Techniques to Lower Your Tax BillsNovember 6, 2023
Taxes are an unavoidable part of life, but smart savers can use fully legal strategies to minimize their tax bills. One method involves increasing withholding amounts on each paycheck.
Other strategies for lowering taxes include consolidating business expenses at the end of each year and taking advantage of optional pass-through entity taxes in over 30 states.
1. Invest in tax-saving instruments
Investors spend hours researching stocks, bonds, mutual funds and exchange-traded funds that offer solid returns – but often neglect to consider how these investments will be taxed, which can substantially diminish after-tax returns.
Tax-efficient investing may not seem complex, but it can have a major effect on your net return. Selecting suitable investment products, timing purchases and sales decisions, account structure options, offsetting gains with losses, as well as strategies such as charitable giving can all make a significant difference to your tax burden.
One of the best ways to invest is with tax-efficient accounts like 529 college savings plans, which combine tax-deferred growth with federal income-tax-free withdrawals for qualifying educational expenses. Other tax-efficient investments include index mutual funds and exchange-traded funds which don’t involve active management but create less taxable capital gains than traditional mutual funds or active ETFs; some investments such as municipal bond interest payments or Roth IRA distributions even escape taxes entirely!
2. Invest in a tax-saving mutual fund
Tax-saving mutual funds offer investors potential for good returns over the long haul and help build wealth over time. These funds pool money from multiple investors before investing it predominantly in equity markets.
Equity Linked Saving Schemes (ELSS), open-ended mutual fund investments which help investors save taxes under Section 80C, enable an annual investment up to Rs 1.5 lakh to qualify for tax rebate.
These funds offer higher returns than fixed deposit, Public Provident Fund, National Savings Certificate and others; however they come with a three-year lock-in period.
Furthermore, they require you to make a monthly minimum contribution and you can invest as little or as much as suits your comfort level – such as weekly, monthly, quarterly or semi-annually depending on how often it best suits. This approach lets you spread out your investments throughout the year while reaping the advantages of rupee cost averaging and decreasing volatility in returns. Furthermore, post-lock in returns from ELSS funds are taxed as long-term capital gains.
3. Invest in a tax-saving equities fund
Equity-Linked Savings Schemes, commonly referred to as ELSS funds, offer market-linked returns unlike fixed income investments like Public Provident Fund (PPF) and tax-saving fixed deposits, which offer lower returns. These open-ended equity mutual fund schemes come with a three year lock-in period and offer tax benefits under Section 80C.
Additionally, equity mutual funds offer greater potential for outpacing inflation and producing substantial after-tax returns than PPF investments, with shorter lock-in periods than PPF and shorter maturities than fixed deposit instruments.
ELSS funds are an ideal investment choice for investors with moderate risk appetite and long-term financial goals. To maximise returns, start investing via a systematic investment plan (SIP), taking advantage of rupee cost averaging to maximise returns. Furthermore, tax loss harvesting allows you to sell underperforming assets to offset capital gains in your portfolio – this strategy could increase after-tax returns by as much as 3% of total federal income taxes paid.
4. Invest in a tax-saving fixed deposit
Tax-saving fixed deposits provide higher interest rates and qualify for maximum deduction under Section 80C up to Rs 1.5 lakh annually, making these investments safer from market fluctuations than their traditional counterparts.
Investors can purchase tax-saving fixed deposits (FDs) from any public or private bank (except rural and cooperative banks ) as per their preference. While single or joint accounts can hold these FDs, only the primary account holder will enjoy tax benefits from them.
Tax-saving fixed deposits typically have a five-year investment duration, during which no funds may be withdrawn before this deadline has passed. Any interest earned on such accounts, however, is taxable and therefore investors should carefully consider their financial goals and risk appetite before selecting this form of investment. Furthermore, before choosing one they should check credibility of bank and terms and conditions carefully as any earnings exceeding Rs 40,000 could incur TDS liability.