Tax Planning: Reduce Your Tax Burden by Opting for The Right Investment Plan

When it is the last quarter of the financial year, you would find people desperately looking for options to invest their money in. The idea behind investing the funds at that time of the year is to reduce the tax burden. Thisexercise by which an individual manages to legally save on taxes is called tax planning. However, to reduce your tax burden effectively, it is essential to choose the right investment plans.

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Since, we have about two months for the financial year to end; it is the right time to plan your tax if you haven’t done it yet. A good tax plan is one that not only reduces your tax outgo but also takes you a step closer to your financial goals.

Importance of tax planning

Tax planning is essential for attaining financial peace of mind, but, we think of tax planning only when we are impelled to present our investment proofs. It is then that we start exploring the best investment options available.

A well-planned investment can help save your hard earned money for future. However, this can only be achieved if we make an informed decision after evaluating all the available options, instead of zeroing-in on the easiest available option. Nobodywould want to buy multiple policies offering similar benefits when you have an array of available investment optionssuch as ULIPs, Senior Citizen Savings Schemes, EPFs, PO Deposits, PPFs, education loans repayment, home loans repayment, etc.

Additionally, effective tax planning also saves you up to Rs. 56,000(over Rs.1, 50,000 deductions available under Section 80C).Apart from investing in life insurance, FDs, SIPs, PF, under Section 80C, you can also invest up to Rs35000 in health insurance and claim tax benefits under section 80D.

When to start tax planning?

The earlier you start, the more you save; that’s how to go about tax planning.The best time for financial planning is the beginning of the financial year (April)Year end is not an ideal time to invest as most of us face cash flow constraints.

Therefore, the best time for investing is the beginning of the year. But, it is also a possibility that someone might not be able to invest at the beginning of the year due to some situations that might not have been under their control.

In such cases, when you are looking at last-minute options, you should invest in instruments that can be issued within the stipulated timeframe so that you can submit the proof of those investments in time and avail the tax benefits. The options that you invest in should add value to your financial portfolio and also help you avail maximum benefit.It is imperative for us to know about each of the instruments that fall under Section 80C, because most of the deductions that we all claim, falls under Section 80C.

How to save tax?

Remember, it is essential to evaluate all the available options in order to maximize tax saving.It is also recommended to seek some relevant information from the IT ACT (1961) (which is packed with information on tax paying and tax saving) before making a decision. We might be already aware of most of the tax saving avenues, but, some of them still continue to be unpopular.

Instruments available under Section 80 C and 80 D

Products available under Section 80C include Life Insurance, Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), Senior Citizens’ Saving Scheme (SCSS), New Pension Scheme (NPS), Bank Fixed Deposits and Traditional Pension Plans.

Life Insurance:Any amount you pay towards life insurance premium, for yourself or your family,is eligible for tax deductions. However, the minimum policy term is 5years. Also, the returns from these investments are not taxable.
Health Insurance:Under Section 80D, you can claim for tax deductions against your Health Insurancepremium or that of your spouse or children. The deduction you can claim is up to Rs20000 for senior citizens and Rs15000 for others.
Unit Linked Insurance Plans (ULIPs): Unit Linked Insurance Plans offer the benefit of investments along with a life cover.The part of premiums left after deducting the cost of life cover is invested in debt and equity instruments.
Pension Plans: You can opt between Pension Plans offered by insurance companies and retirement schemes by mutual fund companies. Both of them give similar tax benefits, however, the amount you receive post retirement is taxable.
Public Provident Fund (PPF): Public Provident Fundadds value to your portfolio. Your contribution towards PPF earns tax-free interest at the rate of up to 8.7%. However, tax deductions under PPF schemes are available only if you contribute up to Rs.1lac.
Equity-linked Savings Schemes (ELSS): Investment in Equity-linked Savings Schemes scores full points on all parameters. Keeping the risk aside, the return on this investment is higher than the returns from any other option.Also, the lock-in period for this is the shortest (i.e. 3 years) amongstall the other tax saving investments.
Senior Citizens’ Saving Scheme (SCSS): Citizens over 60 years of age or those who are above 55 years and have opted for voluntary retirement can invest in Senior Citizens’ Saving Scheme. This scheme comes with a lock-in period of 5years and can be further extended by 3years. SCSS offers 9.2% returns; however, the interest earned is taxable.
New Pension Scheme (NPS): New Pension Scheme funds have managed to perform well in the past 5years. The return from E class funds are in line with those of NIFTY, corporate bonds and gilts have given double-digit returns. In addition to deduction under Section 80C, contributions made by an employer in a year on behalf of the employee are eligible for additional deductions under Section 80CCD. The only flipside to this is that the investment is locked-up until the investor turns 60.

Bank Fixed Deposits (FDs) and National Savings Certificates (NSC): Bank Fixed Deposits and National Savings Certificatesscore high on safety, cost and availability. You can choose to invest in these if you are comfortable with a 5yr lock-in period for better returns. However, this kind of investment is very liquid, which means, it can be used as collateral for raising loan at the time of need. The interest rates are comparatively higher vis-à-vis PPF and income is taxable.

Past 5 Year annualised returns as on 01-09-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The lumpsum benefit is calculated if policyholder invested ₹10000 monthly for 10 years in the fund with a policy term of 20 years. This Point To Point past performance data of last 10 years has been used to illustrate a scenario for the customers benefit. It is assumed that the past 10 years returns would have also been delivered in last 20 years. This is not guaranteed and not in anyway indicative of what the customer may actually get 20 years from now. The investment is subject to market risk and the risk is borne by the policyholder.