While each of these tax-saving investments can help you cut your tax liability, keep your financial goals at the core while making investment decisions. More importantly, pledge to initiate the tax-planning activity for the next financial year on April 1.
This time of the year, most corporates ask employees to furnish investment proofs. Tax computations are based on what is submitted by employees and taxes are deducted accordingly. No wonder, the salaried crowd is busy getting documents in order.
What about those who have not yet invested and are looking for some quick tax-saving investments? This is what experts suggest.
Get the numbers right
Do not jump into one or the other tax-saving investment blindly.
First things first: figure out if you are running short of the permissible tax- saving investments. Many of your existing commitments qualify for tax deductions under Section 80C. For example, you could already be repaying a home loan, paying the tuition fee for your child, contributing to your Employees’ Provident Fund (EPF) or paying life insurance premium.
All these expenses could bring your tax liabilities down through tax deduction benefits under Section 80C, up to a limit of Rs 1.5 lakh.
Compute how much you have already contributed to such avenues and then figure out the shortfall. That is the amount of money you should plan to invest to optimally plan your taxes.
Start with existing investments
Even before you look for new avenues to cut your tax bills, look at your existing commitments. They include your public provident fund (PPF), National Pension Scheme (NPS) and Sukanya Samriddhi Yojana (SSY).
If you have not contributed to these schemes, you can do so quickly and meet your tax planning goals and move closer to your financial goals. Pankaj Mathpal, Founder and Managing Director, Optima Money Managers, recommends investments in PPF and SSY, among fixed- income options, as they fetch tax-free returns.
Also, each of these products have stipulated minimum investments in each financial year, failing which there are penal provisions. An investment, though small, can save you from those.
Exploring new avenues
Since you do not have much time on hand, be calculated in your approach to new investments. Many do not have the skills to analyse and compare financial products.
“In a bid to save taxes at the last moment, people end up losing more money by investing in products they do not need or are unsuitable to them. The result will be tax inefficiency and investing in unsuitable products which do not even beat inflation in the long run,” says Roshni Nayak, SEBI-registered Investment advisor and founder of Mumbai- based GoalBridge, a financial planning firm.
She cites the example of traditional life insurance policies that make people pay hefty premiums and offer returns that are peanuts.
If you make a wrong choice in a hurry, you may remain saddled with it for years, hurting your other financial goals.
Nayak recommends focussing on your financial goals instead of solely on cutting tax bill. “The ideal approach is that tax planning should be viewed as incidental planning,” she says.
This can be understood with an example. Buying health insurance is a must to pay for hospitalisation bills. In that process, you end up enjoying some tax benefits under Section 80D of the Income-Tax Act, up to Rs 25,000 each for self, spouse and children.
The same limit of Rs 25,000 is applicable for your parents as well, if they aren’t senior citizens, yet. But if you and your parents are senior citizens, you can claim a maximum deduction of Rs 50,000 for each of you, in a financial year.
Once you know your financial goals and your target investment amount for tax saving, the same can be matched to strike a balance between the two. Here are some products that can be considered for saving taxes and achieving your financial goals.
Equity-linked savings schemes: Popularly known as tax-saving funds, these schemes invest in shares and offer a diversified portfolio of stocks to the investors. They come with a lock of three years — the shortest among the tax-saving avenues.
ALSO READ| Check out Moneycontrol’s curated list of 30 investment-worthy mutual fund schemes
Abhay Mathure, a Mumbai-based mutual fund distributor, recommends investments in ELSS, retirement-focused schemes of mutual funds and NPS since they can generate returns that can beat inflation in the long term. “ELSS funds have an edge over others since they have less lock-in,” he adds.
ELSS, on an average, have given 14.83 percent returns in the three years ended that ended on January 17, 2023 , as per Value Research.
PPF and SSY: These two schemes are backed by sovereign guarantee.
The former offers a return of 7.1 percent and the latter 7.6 percent. These schemes offer tax-free returns. The only drawback is they come with relatively longer tenures.
While PPF comes with a 15-year tenure, the SSY goes as long as 21 years of age of the girl child. However, both these schemes can be considered by investors keen on building a corpus in the long term. Even investors, in the high-income tax slabs, can consider investments in this.
National Savings Certificate (NSC) and Tax-Saving Bank Fixed Deposits (TFD): They may appeal to conservative investors who hail from low-income tax slabs and do not want long-term commitments. Both have a tenure of five years. NSC offers a 7 percent rate of interest and TFDs offer around 7-7.5 percent.
“Though bank FDs and NSC offer attractive returns, the interest is taxable in the hands of investors,” points out Mathpal.
ALSO READ: Is this the right time to invest in FDs or should you wait for a month?
NPS: To fund retirement and to ensure annuity income in old age, NPS can be a very cost-effective option. It gives subscribers exposure to three key asset classes – equity, government securities and corporate bonds — and offers market-linked returns.
An investment of up to Rs 50,000 in a financial year can fetch tax deduction under Section 80CCD(1B). This is over and above what is available under Section 80C.
Senior Citizen Savings Scheme (SCSS): It is a scheme that comes with a five-year term and can be extended by three years. The scheme, as of now, offers 8 percent rate of interest on the deposit.
A senior citizen can invest up to Rs 15 lakh in this scheme and avail deduction up to Rs 1.5 lakh in a year under Section 80C. The interest is paid quarterly and it is taxed in the hands of investors.
While each of these tax-saving investments can help you cut your tax liability, keep your financial goals at the core while making investment decisions. More importantly, pledge to initiate the tax-planning activity for the next financial year on April 1.