The last quarter of the calendar year is the best. It is one celebration after another. Dussehra, Diwali, Christmas, New Year, the wedding season, and a respite from the scorching heat.
Come January, and reality hits.
It is the time for resolutions, goals and tax planning.
If you are reading this, the headline would have grabbed your attention. And that is what I plan to focus on here – tax planning. Without much ado, let me dive right in and explain what I mean by “earn the right to invest”.
All too often, it is a mad rush to meet our March 31 deadline. And in doing so, we make some grievous errors by padding our portfolio with investments that could be well avoided. Here’s how to sidestep that landmine.
STEP I: Don’t plunge into tax-saving investments without first checking tax-deductible expenses.
Section 80C allows you to claim deductions on investments. You can claim a deduction of Rs 1.5 lakh of your total income under this section. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income.
No one wants to pay more tax than is absolutely necessary. And rightly so. Hence the scramble to invest and look at the options available. But investors must first ask themselves if they really need to invest to save tax. Start by looking at payments. That’s right. There are payments that are eligible for tax-saving deductions under Section 80C.
The annual premium paid for life insurance in the name of the taxpayer or the taxpayer’s wife and children is a tax-saving payment. But do note, the deduction is valid ONLY if the premium is less than 10% of the sum assured.
The tuition fee paid for children is another you must consider. When the word tuition is used, it is the fee paid for a full-time course to any school, college, university or educational institute situated in India. It is not private, out-of-school tuition. Neither is it for fees paid abroad. The caveat being that it is limited to two children only.
The third expense is the repayment of the principal amount of a home loan. This deduction is also applicable on stamp duty, registration fees and transfer expenses. The exclusion is interest payment, for which you can claim deductions under Sections 24(b), 80EE or 80EEA.
STEP II: If you are a salaried employee, you must consider your provident fund.
If you have not maxed the Rs 1.50 lakh limit with the above payments, then move on to check your provident fund contribution.
Do this before you consider any other investment. Contributions to the Employee Provident Fund, or EPF, are covered under the Section 80C limit. This is a retirement benefit scheme that is available to salaried employees; 12% of basic salary is deducted by an employer and deposited in the EPF. Your provident fund contribution accumulated over the current financial year itself might add up to a sizeable amount.
This is all the more relevant in the case of Voluntary Provident Fund, or VPF. Here, the contributor decides on the amount of fixed contribution that is made towards the scheme on a monthly basis.
Under the VPF, employees are allowed to make contributions towards their provident fund account on a voluntary basis. The scheme does not include the mandatory 12% that the employee makes towards the EPF. While technically, employees can contribute up to 100% of their basic salary towards the scheme, it is not mandatory for employers or employees to contribute to the VPF.
STEP III: Now calculate if you have to invest to save tax.
Once done with the above, chances are that you may not have to invest in Section 80C options to save tax. But if you do, here are the list of investments that qualify.
- ELSS: Equity Linked Savings Scheme, which is an equity mutual fund
- Fixed deposits: Tax-saving 5-year bank deposits
- PPF: Public Provident Fund
- NSC: National Savings Certificate
- NPS: National Pension Scheme
- ULIP: Unit Linked Insurance Plans
- Sukanya Samriddhi Yojana: This is strictly for the girl child
- SSSC: Senior Citizens Saving Scheme
Just be aware
Blindly investing in any of the above simply because it has an option under Section 80C is unwise. If you choose to do so, no one is stopping you, but do so knowing fully well what you are opting for.
I have no expenses under Section 80C (no life insurance policy since I have no dependents, no children’s education fees, and I am not servicing a home loan). Yet, irrespective of my contribution to the EPF, I have made a conscious choice to invest in PPF up to the maximum limit of Rs 1,50,000 every single year. Simply because it fits in with my overall risk profile and asset allocation.
Make holistic calls. It pays off in the long-run. A slipshod planning will work against you.
