The tax season is on and taxpayers, both salaried and self-employed are on the run to ensure proper tax savings. As an investor, one should look for investment options that not only saves tax but also ensures tax-free income.

While choosing the right tax saving tool, among several other factors such as liquidity, safety and returns, make sure that you understand how the returns would be taxed. Also, if the amount or the income earned is taxable, the scope to make money over the long run gets constrained as taxes will end up eating into your dreams.

Is there any way to save taxes? Well, there is, defnitely and early planning is the key to ensure optimal returns on any investment or tax-planning activity. It goes without saying that all of us work really hard to earn money, but most of us fail to make the same work properly for us. This is where we go wrong; but we ought to make our money work harder and make the most of it. This can be done by legitimately saving taxes and also letting our money compound over time and build wealth as desired.

So, what are the best tax-saving instruments? If we get to see, we will find that several tax-saving instruments are available in the market.

However, an equity-linked savings scheme (ELSS) can be a great option. An ELSS or a tax-saving equity fund helps you to utilise the Rs1.5 lakh tax deduction under section 80C and also delivers the most efficient inflation and ensures returns in the long run.

Historical data proves that over a period of five to 10 years, returns from ELSS  range anywhere close to eight per cent per annum, which is at par with the current interest offered by Public Provident Fund (PPF). You may argue that along with Section 80C deductions, returns from PPF are exempted from tax.

However, with a five and 10-year average annualised return that has proven to be generally greater than 12 per cent, ELSS can be considered much better off.

While with lower inflation, actual returns in the  coming years might be going down, but ELSS continues to be way better than fixed income alternatives.

Benefits Of Making Tax Investments Early  In The Year

It is always advisable that you give time to make your money work. Same is applicable in term of filing tax returns. The sooner you do, the better returns you reap.

Some benefits of early investment comprise the following:

Leverage The Power Of Compounding

By starting early you have put your money to work sooner rather than later. Your money gets a longer period to compound and allows you to grow your wealth more and farther than last minute investments in March the following year. Yes. The power of compounding is immense.

Reduce Cash Flow Burden

Starting early gives you the option to invest in smaller amounts through SIPs in a tax saving fund rather than investing a lump sum amount in January or February. For example, if you need to invest around Rs1,50,000 towards tax saving under section 80C, you can begin by investing Rs12,000 a month from May to March next year.

Regular investing through SIPs helps you in making smaller contributions out of your monthly salary instead of cutting a cheque for a large amount in one go.

Carefully Select The ELSS Fund

Last minute decisions are always hasty and often turn out to be inefficient. An investor does not get the time to carefully select which is the correct ELSS fund. Such an act can eventually lead to a huge loss. You not only lose the opportunity to invest early, but also may lose out on substantial returns owing to incorrect selection of funds.

Whichever tax-saving instruments you choose to invest in, whether it is a tax-saving ELSS or mutual fund SIPs, always remember that time plays a vital role in investment.

So always remember to invest on time in order to leverage the power of compounding.

The author is the Head of Rank MF at Samco Securities