Are you confronted with the year end confusing option to pick a tax saving product to exhaust your 1.5 Lakh limit. Are you about to buy a Unit Linked Insurance Plan (ULIP) or lock your money in PPF for 15 years? With all the employers sending emails with deadline for year-end investment proof submission, lot of people are making uninformed and hurried decisions of investing in the first avenue that is coming their way forgetting that products with tax benefits serve other purposes as well.
Tax planning is an integral part of financial planning and being unaware leads to incorrect investments.
To avoid similar dilemma, here are a few things you need to do immediately before your start. Don’t worry it’ll only take a few minutes:
Assess the 80C investment gap
Section 80C of the Income-tax Act, 1961 allows you a deduction of Rs. 1.5 lakh and maximum tax saving of Rs. 46,350. The idea is to reduce the taxable income by deducting the amount invested in applicable 80C products. A deduction of Rs.1.5 lakh means tax saving of Rs. 46,350 for someone in the 30.9% tax bracket.
Some popular products include
- Employee’s contribution in Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- Equity Linked Saving Scheme (ELSS)
- Principal repayment of Home Loan
- Children’s school fees
- Life insurance premium
- 5 year fixed deposits
- 5 year post office deposits
- National Savings Certificate (NSC)
- Sukanya Samriddhi Yojana
- Senior Citizens Savings Scheme (SCSS)
- NABARD Bonds
Look beyond 80C
- Section 24 (b): Home loan interest
Buying a house is among several other things an individual wants to do during his or her lifetime. The income tax rules also incentivize the same. You can claim up to Rs.2 lakhs deduction for interest payable on a loan taken for purchase, construction, repair, or renovation of any property under Section 24b. If you have rented out the property, the entire interest is amount can be claimed. In addition, under Section 80EE, you can claim up to Rs. 50,000 towards interest paid on home loan taken to purchase house for the first time.
- Section 80D: Health Insurance policy
Premiums paid towards medical insurance for self or family members are eligible for tax deductions under Section 80D. Premiums paid up to Rs. 25,000 can be claimed. You may claim additional deductions up to Rs. 25,000 under premiums under medical policy for parents and another Rs. 5,000 (total of Rs. 30,000) if your parents are senior citizens.
- Section 80E: Education home loan interest EMI
You can claim the interest amount being paid on education loan taken for yourself, children or spouse. There is no limit on the amount, but the deductions are valid until 8 years from the year of the first interest paid.
- Section 80GG: House Rent Allowance (HRA)
The eligibility criteria for claiming HRA deduction is either Rs. 5,000 per month (up to Rs. 60,000), or 25% of total income, or rent paid less than 10% of total income, whichever is the least. In case HRA is a part of the salary package, this exemption is not available.
Section 80CCD: National Pension Scheme (NPS)
NPS offers you additional tax deduction for investment up to Rs. 50,000 under sub-section 80CCD (1B). Even though this comes under Section 80C, the deductions are treated over and above Rs.1.5 lakh available under sec 80C.
Link your tax saving investments to your goals
Do not blindly invest in a product just because your friend did so. Invest in it only if it fits your requirement. For instance, if you are risk averse or you don’t have any debt in your investment portfolio, PPF is perhaps the most tax-friendly instrument, that helps fulfill your debt investment, considering that the interest received is tax-free. However, the lock-in of 15 years makes it a good product for retirement planning and not any medium term goals e.g. buying a house.
Similarly, if you are looking to lock-in your funds for a few years with higher capital appreciation, ELSS funds come in handy given the underlying investments in equities.
Start as early as possible
Tax saving is more about planning than anything else. The ideal way of saving tax is to start planning at the beginning of the year. By May or June, you should be ready with a tax saving plan. Starting early also allows you to put aside some money every month towards tax planning. If you are planning to invest in tax-saving instruments up to Rs. 1.5 lakhs, ideally put aside Rs. 12,000 every month towards tax planning. This way, there is no burden on your finances on any given month or at the end of the year. This will help you ride the volatility wave as well as compound your returns over a period of time.
So like we said, pick the right products, link it to your goals and start today.