DON’T LEAVE YOUR TAX SAVING TILL MARCH
April 30, 2017 . 321 views
Planning for your taxes is typically an end-of-the-year phenomenon, considering the fact that you must submit investment proofs to your office HR team, so that you can save on the tax being cut from your salary. Well, at times, the tax cut could be your entire salary itself!
There are few fallacies in this method, though. If you leave your tax-planning investments till the end of the financial year, chances are, you may not have enough money left with you to invest in instruments that can save you maximum tax. Secondly, you may end up with investments that don’t necessarily suit your long-term objective.
According to Gajendra Kothari, CEO and Founder of Ética Wealth Management, “Always remember tax planning is incidental. The primary aim of any investment must be financial planning.”
So, let’s see how best you can plan.
The sooner you plan for your taxes, the better it is. The beginning of the financial year is the best time to start tax planning. You not only save tax, but you opt for tax-saving options that are best suited to your needs and goals. 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 ₹1.5 lakhs (that quality for deduction under Section 80C), ideally put aside ₹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.
Know more about Section 80C.
For the uninitiated, you can save as much as ₹45,000 by investing up to ₹1.5 lakhs into tax-saving instruments. So let’s say if you earn ₹12 lakhs per year, by investing ₹1.5 lakhs, your taxable income drops to ₹10.5 lakh. You effectively save tax @30% on the ₹1.50 lakh investing, which is a big saving!
The choice of investments under Section 80C is also plenty. If you wish to invest in debt, you could look at products like Public Provident Fund (PPF), National Savings Certificate (NSC), Tax-Saving Fixed Deposits, Life Insurance Schemes, etc. For an equity exposure, you can invest in Equity Linked Saving Schemes (ELSS) that are also known as Tax-Saving Funds. Don’t miss out on the option of contributing towards the company EPF (Employee Provident Fund), if you are a salaried employee.
However, Section 80C is not just about investments. There are also expenses that can be claimed as deductions. For instance, children’s tuition fees qualify for 80C benefits, and can help lower taxes. Most individuals incur tuition fees anyway, so it makes sense to claim tax benefits when you can. Starting early allows you to keep track of all the expenses that you have made, as well as receipts, so that you can claim deductions thereon.
Link the investment options with your financial 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, PPF is perhaps the most tax-friendly instrument, that helps fulfill your debt investment, considering that the interest received thereon, as well as the maturity amount, is tax free. However, it comes with a lock-in of 15 years. So, if you are investing with the thought of using this money to buy a home after 5 years, it doesn’t serve your purpose. This is ideal to save for your retirement. Furthermore, if you invest before the 5th of the month, you will earn interest on the amount for that month, also.
Similarly, if you are young and just about building your financial corpus, investing in Equity Linked Saving Schemes (ELSS), may be a great option. According to Lakshmi Iyer, CIO at Kotak AMC, “Tax-saving funds have the best of both worlds i.e. it allows tax exemptions under section 80C. Additionally, it also offers a potential for capital appreciation, given the underlying investments in equities.” Now, considering the fact that equity is highly risky, you are better off investing into it systematically, i.e. over periods of time. Hence, a monthly Systematic Investment Plan (SIP), will not only help you save money on a monthly basis, but you will ride through the market volatility, as well. This can be planned from the monthly salary that you receive by setting aside a certain sum towards this SIP.
Want to save more tax?
Now, you can save additional tax by investing ₹50,000 into the National Pension Scheme (NPS), which is over and above ₹1.5 lakh. This qualifies for deduction under section 80CCD. This product is best suited for your retirement goal, considering it is locked-in until your retirement and gives you the benefit of a monthly payout (as annuity) post retirement. So, if you feel that you can manage to save some more money, an additional investment of ₹4,000/month in NPS, will take your total investment to ₹2 lakh/annum, and you can save tax upto ₹60,000 (@ 30% of your income above ₹10 lakh)!
Don’t forget about health insurance!
Health insurance is “perhaps the first thing you should invest in as soon as you start earning”, says Gaurav Mashruwala, a Certified Financial Planner. Take some time out and visit an insurer to understand the amount of health insurance you will need, depending on whether you are single, married, with children. Ideally you want to extend coverage for everyone. Any medical expense can cost you your month’s salary or more, in certain cases. Hence, insure yourself! The amount paid towards premium for a health insurance plan qualifies for deduction under Section 80D (up to ₹25,000). Again, the earlier in your life you do it, the cheaper is the cost of your cover. Pick a month when you think you can manage some surplus, and buy a health cover.
Last but surely not the least, if you start planning for your taxes now, you will save a lot more money as compared to end-of-the-year investing. You would have thoroughly researched all your tax-saving options, planned for adequate sums of money to invest, started earning earlier on, and garnered a higher corpus for yourself – a win-win after all.
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