Get Smart About Your Tax Planning

By Kiran Castelino | December 15, 2017

As the end of the year approaches, there’s generally a mad scramble to get one’s finances and investments in order. Learn why it’s important to plan your taxes and not blindly put money into the first tax-saving investment that pops into your head.

As the end of the year approaches, there’s generally a mad scramble to get one’s finances and investments in order so that the tax man is able to axe as little as possible from your earnings. So, some key questions that beg to be asked are – Have you made an attempt to understand what your tax liability for the year is? Do you have a Home Loan or made investments in ELSS Mutual Funds, or tax-saving Fixed Deposits that could bring your taxable income down? If you already have your tax-saving investments in order, there’s nothing to worry about. But if the term ‘Tax Planning’ sounds like Greek and Latin to you, then you’d better sit up and pay attention!

It’s interesting to note that according to the Association of Mutual Funds in India (AMFI), nearly 50% of the total inflows into the ELSS category take place in the last three months of the financial year. And, perhaps not surprisingly, the month of March has the biggest inflow. Now, will investing in ELSS Mutual Funds help you save tax? It certainly will. But is investing a lump sum in one go really the best way to do things? It generally isn’t considered to be the wisest option. (Read this to understand why SIPs make more sense than a lump-sum investment: Systematic Investment Plan Basics)

Another avenue that people tend to rush towards to save tax is Life Insurance. While Life Insurance does provide one’s dependants with protection and definitely helps you save on taxes, getting yourself saddled in a hurry with a policy that isn’t the most suitable for you might not be the best idea.

Psst… Need help getting a Life Insurance policy that DOES suit your needs perfectly? Click here

It’s important to not just put money into investments and avenues that will help you save tax. You should also take your entire financial portfolio and goals into account when you do. Here’s what you can do to get smart about your tax planning.

Calculate your existing deductibles

Before you dash for the door to make your tax-saving investments, it might be wise to first identify if you’re making any payments that can go as a deduction under Section 80C. (The maximum amount that can be deducted under Section 80C is Rs. 1.5 lakhs)

  1. If you’re a salaried person, check how much you are contributing to the Employees’ Provident Fund (EPF) and subtract this amount from the Rs. 1.5 lakhs.
  2. Do you have children whose school fees you pay? You can use this to get a tax break for a maximum of two children. Keep in mind though, that this is limited to Rs. 100 per month per child for tuition fees and Rs. 300 per month per child for hostel expenses.
  3. Do you have a Home Loan? The principal you repay to your lender is eligible for a deduction. Note that the interest paid on your Home Loan is also eligible for a deduction but this falls under Section 24 and the exemption is up to Rs. 2 lakhs.
  4. If you have any Life Insurance premiums, those premium amounts are also eligible for a deduction under Section 80C. Investing more money in Life Insurance isn’t a bad idea at all. You just need to make sure that it aligns with your goals overall.

There are plenty of other pay-outs that are eligible for a deduction under Section 80C Check the whole list here: Entire list of deductions under Section 80C. But if you’ve made all the above payments, you’ve probably reached the Rs. 1.5 lakh limit that Section 80C is subject to.

If you haven’t reached the Rs. 1.5 lakh limit under Section 80C, you can look at making the following investments.

Investments to consider

  1. PPF or the Public Provident Fund investments are generally considered to be the darling of investments as they fall under the EEE or Exempt-Exempt-Exempt category. This means that your money is tax exempt at the time of investment, accumulation and withdrawal. The tax deduction for this falls under Section 80C and is capped at Rs. 1.5 lakhs.
  2. ELSS or Equity Linked Savings Schemes are another popular investment for tax saving. Investments in ELSS up to Rs. 1.5 lakhs can help reduce your taxable income under Section 80C. Just remember that this investment comes with a lock-in period of three years. And if you choose to invest through a Systematic Investment Plan (SIP), you can redeem your investments on a first-in-first-out basis.
  3. Tax-saving Fixed Deposits are also a popular investment, especially for those who are risk averse. Just remember that this investment also falls under Section 80C (and therefore subject to the Rs. 1.5 lakhs cap) and your money will be tied up for five years.

Though the above-mentioned investments are popular, there are quite a few other investment options under Section 80C that can help reduce your total taxable income. Here’s the entire list: Tax-Saving Investments to Grow Your Wealth

Points to pay attention to

It’s always a good idea that your tax planning is done keeping your overall financial plan and goals in mind. If done smartly, you won’t just be able to achieve your short, medium and long-term financial goals, you’ll also be able to save tax. For example, an investment in PPF is a good way to both save tax and save for retirement, while investment in National Savings Certificates (NSC) is a good option for the medium term.

Additional Reading: The Ultimate Financial Planning Guide 

If you’re wise when it comes to your tax planning, you’ll be able to enhance your portfolio and reach your goals. So, give your outflows and investments a bit of thought and don’t just rush to put your money into an investment avenue without considering first whether it fits well into your overall plan.

Want more information on how to manage your money? Keep reading our blog. We’ll be providing insights all this month on how to get the most out of your tax planning and investments.

If you’ve got something to share, leave us a message in the comments section below. And if you’re ready to make a tax-saving investment or want to learn more about insurance, just hit the button below.

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Category: Tax Tax benefits Tax savers
Kiran Castelino

About Kiran Castelino

Kiran Castelino is interested in everything and everyone! On a perpetual quest to learn new things, she believes that no knowledge is ever a waste. She holds a master's degree in business administration from IAE Bordeaux University. She is an advocate of financial literacy and enjoys reading fiction and non-fiction, studying French and rock climbing in her free time.

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