It is that time of the year.
Your HR department just sent you an email stating the tax that is going to be deducted from your salary in the coming months.
Why? Because you are yet to submit the relevant proofs of investments.
The amount is huge. It has got your eyes to pop out. It totals up to almost a month’s salary.
You quickly call up a few friends, colleagues to ask what to do?
The smart friends suggest you various options to save tax. Each one has his own – ULIPs, Bank FDs, Tax saving mutual funds, PPF, the list goes on. You are left utterly confused as to what to do.
You want to act fast – before the tax axe falls on your salary. Time is running out!
Take a deep breath.
Now, let me state something cruel. This approach does not work.
Do not get me wrong here.
Your friends and colleagues are acting out of their own preferences and what suits their financial goals, hopefully. However, what they choose for themselves may not be relevant to your needs.
Then, investing only for the purpose of saving taxes is NEVER a good idea.
You can achieve so much more by making smart decisions. You can not only save tax but also protect yourself against financial difficulties plus build long term wealth.
Save tax with a plan
The pre-requisite for making the most of your savings and investments is to have a financial plan.
Don’t get scared with this term. What it simply means is that you have to be aware when will you need money, for what purposes and how much? Based on this you can decide, how should your money be invested.
If you are looking to save money for your retirement, for example, then you can choose more long term and aggressive investments. However, in case you need money for purchasing a car in 5 years, you have to be balanced in your approach.
With a planned approach, there are 3 things that you can achieve while doing your tax saving:
- Create financial protection for yourself with insurance
- Invest for building the debt part of your portfolio
- Invest for building the equity part of your portfolio
Let us look at the options under each one of them.
Save Tax – Create financial protection for yourself with Insurance
#1 Buy Life Insurance for yourself – Buy a term life insurance plan only (and not any other). Term plan will give you an adequate amount of insurance cover at the minimum cost. The premium paid for the term plan is tax exempt upto Rs. 1.5 lac under section 80C of Income Tax (IT) Act. This is particularly relevant when you have financial dependents.
Note: DO NOT invest in any other insurance policies such as Endowments, Money Back, ULIP or Pension Plans.
#2 Buy Health Insurance for yourself – In the age of rising medical expenses, a health insurance is a must. For the year 2015-16, premium upto Rs. 25,000 paid for your spouse, kids and yourself is eligible for this benefit under Section 80D. A family floater policy for at least Rs. 5 lacs is a good beginning. Ideally, you should have Rs. 10 lacs of cover.
#3 Buy Health Insurance for parents – You can also buy health insurance for your dependent parents and receive tax benefit on that as well. Premium paid upto Rs. 30,000 for such insurance is eligible for the benefit under Section 80D.
Save Tax – Invest in Debt oriented, fixed income investments
#4 Invest in 5-year Bank Fixed Deposits that also receive tax benefits under section 80C. Most banks will have an option for you. They are risk free and provide assured interest. If you are in a later stages of your life, you may find this option more attractive. However, remember that the interest paid out of these Fixed Deposits is not tax exempt. Only the invested amount can be claimed as an exemption in the year in which you have made the investment.
#5 Public Provident Fund (PPF) – This is the most preferred investment option. The reason is that traditionally PPF has delivered very high rates of interest. However, that is not the case any more. It also receives tax benefits under section 80C to the extent of Rs. 1.5 lacs. In fact, it is tax free at all stages – when you invest, the interest you receive and on withdrawal. And it is backed by government guarantee. Your money is totally safe unless the government itself goes bankrupt.
You can open a PPF account with a PSU bank or at your neighbourhood Post Office. You can make recurring deposits into it starting as small as Rs. 100. (Please remember that EPF is different than PPF. EPF is run through the organisation your work with. However, your contribution into EPF is also eligible for tax benefits under Section 80C.)
#6 National Savings Certificate – You can also invest in National Savings Certificate that is yet another PPF like government backed scheme. It is a one time deposit with a maturity of 5 or 10 years. It is also eligible for tax benefits under Section 80C.
#7 Sukanya Samriddhi Scheme – If you have a girl child who is less than 10 years of age, you can avail of the Sukanya Samriddhi Yojana in her name, which offers currently a 9.2% interest rate, tax-free. The rate of interest will be announced every year. The amount invested under this scheme is also exempt under Section 80C. The scheme has a 21 year tenure but you can withdraw 50% of the money for education of the child when she attains 18 years of age.
#8 National Pension Scheme is another eligible scheme created to provide retirement benefits to Indian Citizens. An amount invested upto Rs. 2 lacs in this scheme is eligible for tax benefits under section 80CCD. There are options within NPS that you can choose and allow your money to be invested in equity and debt.
Save Tax – Invest in Equity oriented Investments
#9 Tax saving mutual funds or ELSS – If you have financial goals for the long term, say over 5 years, an investment in Equity Linked Savings Scheme (ELSS) popularly known as Tax Saving Mutual Funds is a great option to go for. They are eligible for tax benefits under Section 80C.
ELSS invest their funds into stocks of companies and hence take on additional risk which creates an opportunity to generate higher returns. They have a lock in of 3 years – which means you cannot withdraw your investment before 3 years. From a long term investment wealth building, you should seriously consider investing in ELSS funds.
#10 Rajiv Gandhi Equity Savings Scheme – This is yet another long term option. It has been started for the first time equity investors. With this option, you can invest directly in equity/stocks (eligible stocks or funds only) with a lock in of 3 years. You can invest upto Rs. 50,000 and claim a benefit of 50% of the amount invested. However, it is applicable to only individuals with Annual Gross Total Income of less than Rs. 12 lacs.
So, you see there is so much possible in the domain of tax savings. You can use all these options with a plan and do much better. Trust me!
Have any questions on how to save tax. Send them across to us and we will do our best to help.