Quick tips to save tax this financial year

By Sahaj Palla
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Tax saving is something everyone is familiar with - submitting ITRs, investing in medical, term insurances, and the lot. Tax planning however, is not as widespread as it should be. But as the adage goes, a penny saved is a penny earned, saving tax is a good start, effective planning is what truly makes your savings count. This process involves a lot of thought, including assessing the expenses at hand and then executing the plan accordingly.

Wondering where to start? We got you.

First things first, as the term explains in itself, tax-planning requires a proper understanding of the basics of your finances, i.e., your expenses, your goals with money, long-term investments, short-term investments and the lot. Once you've sorted out your finances, you can start planning for tax savings.

The deadline for investing in tax saving returns is March 31st, leaving you with only a few days to invest and save your hard-earned money. That being said, you can still consider options that can help you fulfill your 1.5 lakh deduction claim limit under Sec 80C. Let us take a look:

What are Equity Linked Saving Schemes (ELSS)? 

ELSS funds, also known as tax-saving mutual funds, can save you up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These funds come with a short lock-in period of three years, which is the lowest among all tax-saving investment options in India. However, the return on ELSS funds depend upon their market performance as it locks 80 percent of its assets in the stock market. These stocks are drawn from different market capitalizations, i.e., large, mid, and small companies to give the best long-term wealth appreciation.

What is a National Pension Scheme (NPS)?

A government of India scheme, the NPS was created for Indian citizens in the age bracket of 18 to 70 years to have a pension, after they retire from employment. This scheme allows for tax saving on investments of up to 1.5 lakhs. However, being a pension scheme one must keep in mind that the investments in an NPS are locked until the investor turns 60 years of age. Furthermore, if one wants to withdraw prematurely, they lose all the tax benefits on their corpus. For more information click here.

What are Unit linked insurance plans (ULIP)?

ULIPs combine both insurance and investments and help in building wealth while providing life insurance at the same time. ULIPs are long term investments that help you save and build money for life’s special events like marriage, higher education etc. With investments in ULIP you can claim deductions up to 1.5 lakhs and returns you earn are exempt from income tax.

Public Provident Fund (PPF): PPF is another GoI scheme that is very popular and considered a safe tax saving investment platform. This provides tax saving of up to 1.5 lakhs under section 80 C and the returns are exempted from tax. PPF, however, is a long term tax saving investment option and the investments have a 15-year lock-in period.

What is a National Savings Certificate (NSC)?

NSC is another government of India tax-saving scheme that has a lock-in period of only five years and helps in saving up to Rs.1.5 lakhs in tax. TDS is not applicable on an NSC, however, the returns from the NSC are taxable as they come under ‘Income earned from other sources’.

What is a Tax - Saving Fixed Deposit?

As the name suggests it is an FD that helps in saving tax deductions of up to 1 lakh, however, unlike other FDs, tax saving FDs come with a 5 year lock-in period. Interest rates on tax saving FDs vary from bank to bank, but it is important to note that returns are fully taxable.

Now that you know where to put your money, here are a few tips that can help you make the most of tax-planning.

Invest wisely

Just because it saves tax doesn’t mean that it will suit your money goals. Investments for tax saving have to be thought of as a long term investment. Once you invest you’re locked in for a long period of time. For example if you invest in a National Savings Certificate, your money is locked in for five years, and for fifteen years if you choose a Public Provident Fund. Though these investments save taxes, you can't access the money before the lock-in period ends. It is wise to take a comprehensive look before you make a tax saving investment.

Under/Over investing

Under investing is fundamentally not claiming the entire deduction available to a taxpayer with tax saving investments. For example - Under the old regime a taxpayer is allowed to claim deductions up to 1.5 lakhs under section 80C of the Income Tax Act. Have a look at these Tax saving plans under section 80 C. On the other hand Sec 80C is not available in the new tax regime.

Contrary to under investing, over investing is where taxpayers invest more than the deductions available. However, this doesn’t have any negative impact except for the fact that their money gets locked up for a longer time making it difficult to recover, let’s say, in the case of an emergency.

Account for ‘tax’ on tax-saving investments

One thing that all taxpayers need to keep in mind is that they save tax on the investments, not on the profit they receive because of the investment. For example: Interest received on a tax saving FD is taxable and funds received beyond 1 lakh from ELSS are heavily taxed at 10%. NPS however, is tax-proof, so is PPF.

Conclusion

Taxes help in building a country’s infrastructure, however, the government also understands that not every individual's spending habits are the same. Deductions, therefore, let the government help in building good financial habits that are beneficial for the people as well as the government itself.

Spend wisely, invest well.


Disclaimer: The information in this article is compiled from various sources and is an opinion piece only. This is not to be taken as a substitute for professional advice on managing finances, reader discretion is advised.