Five Smart Moves to Increase Your Return on Investments

Getting the best bang for your buck is everyone’s goal when they spend money or when they invest it. But how often do we get into the nitty-gritty of how and where we can maximise our return on investments? Don’t worry! This article will lay out five simple yet smart strategies that will help you maximise your return on investments.

• Tax planning at the beginning of a financial year

One of the biggest mistakes that most people make is to make last-minute tax-saving investments at the end of the year and with the sole intention of reducing one’s tax liability. But truth be told, apart from health insurance, every single investment should be made with the sole intention of maximising returns and wealth. 

Investing at the beginning of a financial year has its advantages. First, you get savings out of the way and spend only what is left after saving, rather than the other way around. It also builds healthy investment habits and sets the pace for the rest of the year. Second, with investments like PPF, ELSS, etc., investing at the beginning of the year ensures more time for your money to grow.

• Making investments in the name of your children or parents

Investing in your children’s names is also a way to maximise returns, but until the age of 18 years, these investments may attract clubbing provisions under the Income Tax Act. However, once your kids are 18 years or older, you can go ahead and make investments in their name, such as PPF, tax-saving fixed deposits, or even invest in stocks and mutual funds.

Similarly, gifting money to your parents to invest can also help you in tax savings and maximise your returns, especially if they do not have an income of their own or are in a lower tax bracket. 

• Investing in the name of your spouse

Gifting money to your spouse for their personal expenses is not taxable. They can use the cash to invest in various tax-saving investments, increasing the overall return on household investments. 

Investing in joint names is also a good option. For instance, when you buy a home in joint names, both you and your spouse can equally claim a Rs.2 lakh interest on loan deduction under the Income Tax Act. You can also claim the principal portion, likewise. Note that both of you should be contributing to repaying the loan. 

If the property is purchased for the purpose of renting out,  the rental income is also split and taxed separately in your and your spouse’s name.  This reduces the tax liability and maximises returns.

• Investing in NPS

NPS is a great option for investing but somehow not as commonly used as PPF, bank deposits, etc. The NPS scheme has been in effect for over a decade and so far has delivered good returns of 8% to 10%, annualised. Besides, investing in NPS also allows investors a tax deduction of Rs.1.5 lakh per annum under Section 80CCD(1), which comes under the broader Section 80C. Investors should note that this deduction is, however, limited to 10% of salary or 20% of total income in the case of self-employed taxpayers.

• Being aware of how your investments get taxed

While making tax-saving investments, it is important to know how exactly they get taxed. This way, you can allocate funds more prudently and maximise your returns. 

For instance, the interest earned from National Savings Certificates (NSC) and tax-saving fixed deposits are added to your taxable income and taxed as per your individual income tax slabs. If you fall under the 20% or 30% tax slab, your post-tax returns from these instruments may not give you great returns when compared to PPF, which is tax-free, or investing in mutual funds, which are taxable, but may fetch you a higher overall return. Hence, computing your post-tax return is important before you invest as well as being aware of any early withdrawal implications.

For any clarifications/feedback on the topic, please contact the writer at athena.rebello@cleartax.in