Hello friends! Welcome to this podcast by Angel Broking.
Doston Covid ne pichle saal kai logon ke savings plans ko somewhat derail kar diya. Kal main apne dost Shakul ke ghar gaya tha - we were having chai at his home after three months . . . Oh god! We used to have our evening chai’s at his home everyday - and see what Covid has done to our dosti! Haha
Achcha chai aur dosti toh chalti rehti hai. Lekin covid pandemic ke time par Shakul lost a chunk of his invested savings relocating to a ‘work from home’-friendly place in Bangalore. We were discussing his finances yesterday, and he raised this subject of tax savings once again. Yar taxes ki baat cheet kabhi purani hi nahi hoti - am I wrong?
When I asked Shakul about his taxes, usne mujhe bataya ki he is paying over 1.5 lakhs in taxes every year. Ye sunkar I was shocked! Main bhi Shakul ke saath kaam karta hun, I also get paid the same money every month for doing the same work. Then why is Shakul paying one lakhs more than me in taxes?
To answer this question, I set out on a journey of reviewing Shakul’s finances together after we got done with the chai. And guess what I found out? Shakul was investing in two instruments - mutual funds, and gold. That’s when I realized how I ended up paying less taxes than Shakul. Believe me, it is easier than it sounds - because after I told him about these two things, he was convinced that this is the way to go about saving taxes! And now I’m going to tell these two things to you. Well, more like introduce you to these two things.
And these two things are PPFs and ELSS. Ye dono hi kuch complicated acronym jaise sound kar rahe honge, but trust me - these are very basic investment schemes with nothing complicated about them - except the fact that they save you taxes if you invest in them.
Save taxes for earning more money, Sounds like a win-win, doesn’t it? Exactly
Alright, so PPFs and ELSS save you taxes - but how? Janne ke liye, continue listening about the differences between PPFs and ELSS.
Number 1 - Sabse pehle dekhte hain ki ye dono instruments karte kya hain. PPFs basically government backed investments hote hain, jinme aap apne savings long term ke liye invest kar sakte ho. ELSS, on the other hand are equity linked savings schemes. Inme aap short or long term ke liye invest kar sakte ho, and these schemes open up your money to the equity markets. Ye toh hua functional difference. Arre main PPFs ka full form toh batana hi bhool gaya - PPF stands for Public Provident Funds. If you are looking for a recap, understand that PPFs are government backed investments, and ELSS are linked to equity markets.
Number 2 - Ab dekhiye how investment in both of these instruments actually works. ELSS and PPF are very simple to understand from this perspective - inme aap basically monthly payments karte ho, ya fir lump sum.. Kabhi recurring deposit ya fir mutual funds mein invest kiya hai? ELSS are very similar to them - aap ek baar mein kuch set amount pay kar sakte ho - aur is paise ke upar aapke gains grow hote hain lock in period mein. Ya fir, aap monthly payments ke liye bhi opt kar sakte ho. In dono mein se aap kaunsa option choose karte ho, this is up to you. Lekin agar aap ek salaried individual ho, toh monthly payments work better. On the other hand, if you are a business owner then toh lump sum deposits might make more sense for you.
Number 3 - Let’s see these investments from a timing point of view - and please be careful, kyunki ye PPFs and ELSS ke beech sabse bada difference hai. PPFs basically long term investments ke liye ideal hote hain. Isliye, PPFs mein aapko apne funds PPF account mein 15 saal ke liye locked in rakhna padte hain - although you can withdraw a partial amount after 6 years. ELSS mein aapka lock in period 3 saal tak rehta hai - iske baad investment period extend karna optional hota hai. Now you probably know ki agar aapko ek car ya new laptop purchase karne ke liye kis scheme mein invest karna suitable hoga, haina? Ji haan - ELSS sahi answer hai - kyunki ELSS aapko short temr mein save aur invest karne ka provision dete hain!
Number 4 - Kya ELSS aur PPF ki tax savings mein koi difference hai? Ji bilkul - is point mein yahi dekh lete hain. PPFs aur ELSS - dono mein aapki investment amount tax free hoti hai. But there are limitations - PPFs mein aap maximum 1.5 lakhs annually contribute kar sakte ho, jabki ELSS mein there is no such cap. Lekin the more important difference lies in tax treatment of the gains. ELSS mein 1 lakh tak ke capital gains tax free hote hain. Uske baad tax will be charged for you at 10% for your long term capital gains. PPFs mein the amount you recieve on maturity is also tax free. Cool, haina? This is exactly why PPFs and ELSS are a must in every earners portfolio in India. But more on that later.
Ab dekhte hain last point - that is, number 5 - How volatile are these investments? Iske liye, you will need to understand how these instruments work. PPF is basically a way of funding the government’s monetary requirements, and earning interests on that money in return. On the other hand, ELSS mein aapke paise equity markets mein invest hote hain. While the question of volatility makes no sense for PPFs, ELSS mein volatility fluctuates by market conditions and other factors.
TOh friends, these are some of the major differences between ELSS and PPFs. Ab you might be thinking ki which one you should invest in. Am i right about that? Don’t worry, we’ll take a look at that shortly. Lekin before we do, just think about - ELSS basically short term investment instrument hai, aur PPFs are long term investment vehicles. Firstly, every individual comes with both short term goals and long term goals when approaching investments. You might need a plan that helps you save for your house purchase 20 years down the line, and maybe your car or motorcycle purchase a couple years later. These two instruments must therefore be used together, in a solid financial plan geared at saving taxes to the fullest.
Now you probably also understand ki there is no such thing as choosing between a PPF and ELSS. Both are right for you, and you should start investing in them asap. Do note ki tax exemption on these instruments is capped at 1.5 lakhs under section 80C.
But here is another thing - if you are a high earner, then both of these instruments become a must for you to invest in. Let’s check out why that is the case.
Suppose ki aapki income 15 lakhs hai, and you are currently paying taxes at 30% on your tax slab. Iska matlab ye hai, ki even if you are investing in mutual funds with 15+% returns, tab bhi you will end up paying 30% on your capital gains over time. Compare this to ELSS - jahan pe you will only have to pay 10% taxes on your gains of above 1 lakhs.
Sounds like a plan for tax savings, doesn’t it? Then why not get started with it? Friends, don’t forget ki tax savings is a continuous process, not a one time evaluation of your finances. Isliye, keep an eye on new ways and rules of savings taxes, and adjust your financial journey accordingly. If you are actively looking for them, then don’t forget to check out Angel Broking’s youtube channel - wahan pe aapko taxes save karne ke liye kai resources milenge.
Toh doston, aaj ke podcast mein bas itna hi. Milte hain firse, sometime later - until then. Goodbye from Angel Broking, and happy investing!