Section VI: Income Tax and Your Financial Planning

• Ques: Invest In tax efficient instruments for higher returns
• Ans: Key points:
  • Tax efficient instruments are PPF, ELSS and ULIP.
  • You will save tax by investing in section 80C instruments.
  • Fixed deposits with bank and NSC offer tax saving at the time of investment only. The interest accrued annually is fully taxable hence it reduces the return on investment up to 33%. The fixed deposit at 9% actually gets you less than 6% effective interest rate.
  • Interest earned from recurring deposits kept for your kids gets included in parent’s income thereby increasing your tax liability. However, if you invest in mutual fund/ELSS/ULIP, there is no addition in parent’s income plus you get higher return.
  • Return on investment is most important in the long run as it affects your corpus.