Make Timely & Right Tax Savings Investments & Overcome the Fear of Tax Planning

Wouldn’t it be just great if we lived in a world where we didn’t have to worry about planning for investments to save taxes, or even better not pay taxes altogether? However, if wishes were horses, beggars would ride. So it’s only logical to say that to get tax benefits and to avoid any last minute shocks we should plan our investments well in advance.

Ideally, a financial plan, which also includes tax planning, is more of a basic need for every earning individual and should be done religiously so that the hard earned money works for us rather than plainly losing it in taxes. The government also incentivizes us to undertake this activity (tax planning) if we opt to invest in certain avenues of investments. Tax planning/investments to save taxes can be done under

options available under different sections of the Income tax act viz.

1. Deductions under Chapter VIA - Sec 80C, 80CCC, 80CCD (Benefits of up to Rs 150000)

• Contribution to Pension Plans [u/s 80CCC]
• Payment of Life Insurance Premium (For self, spouse & children )
• Deposit in Public Provident Fund (For self, spouse & children )
• Purchase of National Saving Certificates (VIII Issue)
• Purchase of Unit Linked Insurance Scheme (ULIP)
• Contribution to Equity Linked Savings Scheme (ELSS)
• Fixed Deposit for 5 years with a Scheduled Bank
• Sukanaya Samriddhi Scheme

2. Contribution to National Pension Scheme (NPS) U/s 80CCD (1B) - [ Additional benefit of Rs 50000 over and above limit of 1.50 lakhs U/s 80C ]Deduction u/s 80D, 80DD, 80DDB, etc.

• Mediclaim Policy Premium [u/s 80D]- up to Rs. 25,000/- (includes Preventive health checkup )- >> Self, spouse, and children
• Mediclaim Policy Premium [u/s 80D]- up to Rs. 25,000/- (includes Preventive health check-up) for Parents (Rs.30,000/- in case of Senior Citizen)
• An investment made under notified equity savings scheme [U/s 80CCG] - up to Rs. 50,000/-

As per the industry expert’s advice goes everyone talks about a systematic approach to investing (it can
be for tax planning too). The advantages of heeding to this advice of systematic investing are:

1. Reduces Risk because of “Rupee Cost Averaging”
2. Less burden because of small amount of money saved at regular intervals
3. Timing the market is not necessary (in case of ELSS)
4. Long-term financial goal can be aligned with small regular money installments
5. Disciplined approach towards Investment helps in controlling the emotions

It’s also important to remember that these investment options need to be in alignment with your overall financial goal/plan and shouldn’t be opted solely for the purpose of tax benefits. For example, investing in Term Plans/Endowment Plans/ULIPs (Unit Linked Insurance Plans) etc. needs to be in alignment with your insurance requirements too. These insurance plans are sold like hot cakes in the quarter beginning January, through the month of March even though they might not yield any return (in case of Term Plans) or returns not more than 5-6% (Endowment plans) and their lock-in period is generally longer than other options available in the market. So it’s important to assess the investment option’s pros and cons before making such decisions.

Another point to keep in mind is to make an informed decision and not invest in haste, you need to be careful. For example people often end up investing in mutual fund with the hopes of getting tax benefits, but it’s important to note that under the section 80-C of the income-tax act, ELSS (Equity-Linked Saving Schemes) & certain schemes prescribed specifically under RGESS (Rajiv Gandhi Equity Savings Scheme) are the only mutual funds that provide such benefits.
Further, at times you may end up investing in an option, for whose tax exemption you aren’t even eligible. For example in case of RGESS (Rajiv Gandhi Equity Savings Scheme), you are eligible for tax saving only if you are a first-time equity investor. In case of Term deposits made to banks and post office, there are no tax benefits for the deposits with less than five years tenure.

You should also be very careful of the tenure, for which your investment will be blocked. For instance, in the case of Public Provident Fund (PPF), minimum tenure is of 15 years. So on the off chance that you miss the installments, you will have to pay a penalty, also liquidity will be a problem because you will not be able to withdraw before the stipulated tenure of the investment. So focus on an investment option for which you will have the capacity to put resources into.

Lastly, in case of a hurried investment made in the last few days of the financial year closing, there is a chance that your payment may not get credited (in case of payments made via cheques, they can be rejected due to various reasons or get credited late). In such a case even though you have made your investment you won’t be in the position to claim the tax benefits. Additionally, if you don’t make timely investments, you will also miss out on claiming them as tax deductions, which will ultimately result in taking home a lesser pay. So plan your investments well in time and save a huge amount in taxes.

However, if you still find yourself at the crossroads of making last-minute investments or losing out on tax savings, here are a few recommendations that may come handy:

You can opt for ELSS (Equity-Linked Saving Scheme). This is one of the preferred options, as you don’t have to make recurring payments, the tax on interest earned is tax-free, the lock-in period is of three years and you can invest in the most suitable ELSS fund through any of the plans that suit your requirements: be it SIP or Lumpsum. Further, the process of researching and selecting a suitable ELSS plan is convenient and time-saving as it can be done online.

You can also try investing in short-term plans like a five-year tax saver Fixed Deposits. However, this option will be helpful only if you are in the lower tax bracket. Also, note the interest on this investment option is taxable. The receipt mailed to your account for the Fixed Deposit will serve as a proof for claiming tax benefits. Other option to consider is Term Insurance. You can easily buy these plans online, which will do away with the need for an agent and thus you will end up saving more as no part of the premium would be directed towards the agent’s commission. If you prefer to play safe and invest in low to medium risk investment plans, you can opt for PPF (Public Provident Fund) or NPS (National Pension Scheme). Do remember that the tenure for these options is quite long, so consider these only if they are in alignment with your requirements.

Another option that can be tried is Health Insurance; you can check and buy these directly through the company websites or online aggregators. These can be easily bought online as in most cases for a person under 45, who doesn’t have any major ailment history; there is no requirement for a medical test.

So now that you are equipped with the needed information to make an informed decision, one that is not just influenced by the need for tax saving but part of your overall financial/investment plan.