Your Money: Tax saving for latecomers

The rush for tax-related documents starts around this time, when the human resources department sends an e-mail asking employees to give their investment declaration form, along with proof of investments. If you fail to do so, your organisation will start deducting the applicable taxes from your salary, resulting in significant cuts over the next three months.

Though this exercise is undertaken every year, many people feel at this point that they could have planned their investments better. The ideal time to begin tax planning is at the start of a financial year. Planning tax-saving investments at the last minute leads to  purchase of wrong products that can harm your finances for years to come. If you haven’t made any tax-saving investments till now, there’s still time. Take stock of your finances and plan accordingly.

First, calculate the amount you will earn over the next three months, deduct your expenses and then arrive at the sum you can spare each month for tax-saving investments. If you have a home loan, check how much more you need to invest in other tax-saving instruments. Accordingly, plan the monthly outgo for each product. Also, based on the other investments you may have already made, you need to decide how much you wish to allocate to a market-linked product like equity-linked savings scheme (ELSS) versus a fixed-income product such as Public Provident Fund (PPF). 

Choose the right products

Tax planning differs from one individual to another, depending on factors such as age, income and components of salary. An individual earning an annual salary of Rs 4.5 lakh will have the option to save up to Rs 2.5 lakh. This includes Rs 1.5 lakh deduction in Section 80C, Rs 50,000 in the National Pension System (NPS), and the rest via other deductions such as health insurance. An individual in a higher income bracket might have different sources of income — from house, interest income, etc. He would also have more options for tax saving — deduction on home loan interest and principal, higher house rent allowance and so on. For high-income earners, Employee Provident Fund (EPF) and housing loan can take care of Section 80C deductions.

Savings made on taxes will increase the real income in your hand. Tax-saving investments can also help you achieve long-term goals such as retirement or children’s marriage. The best instruments are those that have the exempt-exempt-exempt (EEE) tax regime. You enjoy a deduction at the time of investment, and there’s also no tax on accrual or withdrawal. A 30-year-old can accumulate about Rs 1 crore by 60 years by investing Rs 1.5 lakh each year in PPF. The same investment made in a top-rated ELSS can yield around Rs 4 crore.

The choice of instrument, however, should also depend on your risk appetite, chosen allocation to debt and equity, and so on. Don’t choose a product based only by returns. If you already have an ongoing systematic investment plan in an equity mutual fund, which comprises 70-80 per cent of your portfolio, you should then look at PPF rather than ELSS.

Since you are already late in planning your taxes, don’t delay it further. The government revises the interest rates on small savings schemes every quarter, based on the yield of 10-year government securities. PPF and National Savings Certificates rates could come down in January, which would lower your returns if you don’t invest now.

Before you start investing, ensure  you are properly covered for risks. Buy a term insurance plan suited to your needs. If you don’t have one, get one and then look at investment products. Avoid insurance-cum-investment options such as unit-linked investment plans (Ulips) and endowment products. Also, five-year tax-savings bank fixed deposits are no longer attractive after the interest rates on these were revised recently. 

Beyond popular avenues

Several more avenues for tax saving are available beyond the popular ones under Section 80C and Section 80D. An additional deduction of Rs 50,000 is available on the NPS. Check if you are claiming the housing rent allowance. You also get a deduction of Rs 30,00 if you pay for health insurance of parents who are senior citizens (60 and above). You can also deduct up to Rs 80,000 spent on medical treatment for parents above 80 years for specified diseases.

Do-it-yourself

If you don’t have an advisor, you can take the help of online services that can do both tax planning and overall financial planning for you. They can customise tax savings solutions for your needs and also let you monitor your investments. They are better than asking your chartered accountant or insurance agent for advice. As the advice is automated, using algorithms, their solutions don’t have a bias. The writer is founder and CEO, 5nance.com


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