While planning tax for the financial year should not be a year-end activity, many evaluate their tax savings options only towards the fag end of the financial year. The last minute rush often results in inappropriate investment decisions. The term tax planning is often misconstrued as planning for the Section 80C related investments. Although planning your investments to benefit from Rs 1 lakh deduction provided by Section 80C is a significant part, tax planning could have a much wider scope for certain individuals depending on their financial situation. Tax planning is an integral part of overall financial planning and you should refrain from making ad hoc investments with the objective of saving tax.
As we progress towards the last quarter of the current financial year, it is time to sit up and get your tax related papers and investments in place. There is a host of tax saving instruments qualifying for a deduction under Section 80C of the Income Tax Act. Section 80C allows a deduction of Rs 1 lakh from the gross total income for certain expenses and for investments made in certain tax-saving instruments such as Provident Fund (PF), Public Provident Fund (PPF), life insurance, National Savings Certificate (NSC), and equity-linked savings scheme (ELSS) to name a few.
Here are some tax-saving instruments:
Provident fund
Employee's contribution to a recognised Provident Fund qualifies for a deduction under Section 80C. While contributions to PF work towards building a corpus for retirement, they also enable to save tax along the way.
Public Provident Fund
Public Provident Fund (PPF) qualifies as one of the best instruments for saving tax. Its safety, high post-tax effective return and exemption from tax make it a must-have in your debt portfolio. The tenure of PPF is 15 years and a minimum investment of Rs 500 per year is required to keep the account alive and maximum contribution in any year is Rs 70,000. A contribution of Rs 70,000 per year for 15 years could grow to a neat Rs 19 lakhs on maturity coupled with the benefit of tax saving every year.
NSC and FD
Another traditional instrument which has been very popular for tax saving is the National Savings Certificate (NSC). It comes with a lock-in of six years and interest at eight percent compounded half yearly which is taxable, thereby reducing the effective yield.
Banks offer five-year fixed deposits which are eligible for deduction under Section 80C but interest received is taxable. While PPF scores better than these two instruments on the returns front, the lock-in period is comparatively lesser for these.
Life insurance
Premiums paid for life insurance plans are deductible under Section 80C. Insurance however should not be looked at as a tax saving product and should be bought strictly on need basis. People often remain under-insured when they buy policies for tax breaks or land up buying inappropriate products in order to get a tax exemption.
Equity-linked savings scheme
Equity-linked savings scheme (ELSS) offers the twin benefits of tax saving and equity investing. These are equity mutual funds with a lock-in of three years, dividends declared are tax-free and since gains are long-term in nature, there is no capital gains tax. ELSS is suitable for investors with high risk appetite.
In addition to these instruments, other qualifying amounts for Section 80C are investments in post office time deposits, Senior Citizens Savings Scheme, tax-saving bonds and contributions to pension funds, home loan principal repayments and tuition fees of children.
While choosing the investments, you should give due consideration to lock-in periods, posttax yields and risk involved. A well thought-out tax plan aligned with the overall asset allocation, goals and risk appetite will bode well for the future.
