There is no denying the fact that the moment the new year comes around, lots of people suddenly wake up and realise that they haven’t got their tax saving investments in order and they now have to face the prospect of having to pay a hefty sum in the form of tax.
This late in the day, you will probably neither have the time nor the inclination to understand how the whole process works. Never mind doing an analytical study to understand how various instruments and investments can help you save tax.
But what you can do is pay close attention to what is about to be said in this article because it could help you save a whole lot of time and decent amount of tax.
Before we get to the plan to save you from paying a huge amount of tax on your income, let’s first get some perspective on the money involved. The first thing you need to do is determine just how much money you will be able to invest. Once this is done, we can start looking at the various financial instruments in which you can invest this amount.
(One thing you will need to keep in mind is that all the numbers mentioned here are estimations and when you actually make your investment, there could be a slight difference in what you pay.)
There are several sections under the Income Tax Act which make provision for tax saving. We’re going to look at some deductions available under Sections 80C and 80D. Thanks to sections 80C (max investment limit of Rs. 1.5 lakhs) and 80D (max investment limit of Rs. 45,000) of the Income Tax Act, you can save up to Rs. 1.95 lakhs from your taxable income. But, if you think that this amount is way beyond your means, try investing a smaller amount. Let’s say you decide to invest Rs. 80,000. Now the question becomes, where should you invest this money?
Additional reading: Tax deductions demystified
Here’s where you can invest
Health Insurance: Investing in Health Insurance not only saves you from paying tax, it also makes sure that you don’t have to dip into your savings should you face a medical emergency. As medical treatment can be very expensive, a good amount of cover for an individual could be about Rs. 15 lakhs (subject to your choice and needs). To get a cover like this you might end up paying about Rs. 11,000 as the annual premium. And NO, you can’t bank on the insurance provided by your employer because the sum assured might not always be enough to cover your expenses.
Life Insurance: Now this is an instrument that has a lot of variants like endowment plans, pension plans and ULIPs, but for you let’s consider the most basic form of insurance which is term insurance. You can take a Term Insurance plan that offers a cover of up to Rs. 1 crore for the payment of a premium that would come to about Rs. 9,000 per annum. If you can find a plan that offers return of premiums then it’s even better since you’ll get a maturity value with a term return on your premium (TROP). Make sure that you check the claim settlement ratio of the insurance company you choose.
So, these two options are going to help you save some tax and prepare for eventualities but what about investing in something that’s going to help you making some money in addition to helping you save on your taxes? From the original Rs. 80,000 you had invested, you should now have about Rs. 60,000 left over. To make some money with this, here is what you do.
Mutual funds: That’s right, Mutual Funds is where it’s at. If you invest in a tax saving mutual fund then you will have the option to make money and save on taxes under section 80C. Invest about 10,000 in an ELSS (Equity Linked Saving Scheme) and from the new financial year switch to investing in the same scheme through an SIP. Be cautious when investing though, as this type of investment, like any other, comes with its own set of market risks.
Fixed Deposits: A bank FD is the grandpa of the savings world and is considered to be the safest mode of investment clubbed with steady growth. For the purpose of saving on income tax, you can invest the remaining Rs. 50,000 in a tax saving fixed deposit. These deposits come with a lock-in period of 5 years and an interest rate of about 7.5% to 8% per annum based on the bank. The FD will form the safety net in your investments which means that if the ELSS betrays you, the FD will still have your money safe and sound.
Guess what! You’ve just invested Rs. 80,000!! This means that you can show these investments and have your taxable income reduced by Rs. 80,000. If you can afford to invest more, please go right ahead. Remember that 80C will let you invest up to Rs. 1.5 lakhs
But wait! What if you don’t have 80k or more to invest? Well, you’ll just have to invest as much as you can spare before 31st March and try to plan better for the following year.
Additional reading: Investments made and taxes paid. What next?