With the beginning of the new calendar year 2022, we have entered the last quarter (January – March) of the current financial year 2021-22. This is the time of taxing moments as salaried as well as business class get into the act of calculating their income tax burden. At the same time, they look for appropriate tax rebate options to loosen the tax net.
Precisely, this is the onset of some maddening moments for those who fall in the income tax bracket. However, those falling in the tax net need to gear up to make these maddening moments, very sane one. This means, they should look for appropriate tax saving avenues. There are certain things in which the government wants its citizens to invest for their own good and for the welfare of the nation. So to encourage people to invest their money in “these certain things” the government grants income tax exemption.
However, the key is to understand how tax-saving investments could fit into one’s finances and adopt approaches that will help to choose the right tax-saving investments. So, the basic thing in axing the tax is choosing the right kind of tax saving investment option. If one invests part of his income into government bonds, infrastructure bonds, life insurance, bank fixed deposits etc. then one’s income will reduce. This means he has to pay less income tax.
The investment in these tax saving things does not just go away. One is actually creating an asset that produces money. So, instead of losing the earning power of the money by paying income tax, one could use the money to create an asset and also save tax. Pertinently, efficient tax-saving planning is entirely dependent on quality financial planning. This financial planning is all about managing money. And the best tool to manage your money to bring financial convenience to you is to prepare a budget.
We have a bad habit of deferring our tax saving investments till the last quarter of the financial year. This way, most of the time, we end up investing casually without aligning tax saving investments to our benefit. We invest in instruments which might not help us to create wealth in the long-term. Precisely, while tax planning is important, getting aware of all tax saving schemes and choosing the right one is crucial. Here it’s advisable to seek advice from a financial consultant before making any investment, especially in the stock market to make these maddening moments a very sane one.
What is the best time for tax-saving planning?
Tax experts say the best time to start planning tax-saving investments would be the beginning of a financial year. If you plan at the start of the year, you can make investments that can also help you fulfill your long-term goals. Tax-saving investments should be used to build wealth as well, not only to just save tax.
It is to be noted that there are three basic things that need to be taken into account while planning tax saving. Firstly, check the tax-saving expenses you are already making that you can claim. This includes expenses like insurance premium, children’s tuition fees, etc. Secondly, deduct this amount from the threshold limit to work out how much you need to invest. The entire amount doesn’t need to be invested if expenses are covering it. Lastly, choose a tax-saving investment scheme matching your financial goals.
You also need to keep in mind that investments in tax saving instruments should command the same well-researched and careful approach that you observe in other investments. The best approach to tax planning is to invest throughout the year in a certain ratio such that by the end of the year you’ve taken advantage of most of the tax saving opportunities. The strategy of investing throughout the year in a staggered manner will not put liquidity pressure at the end of the year.
What are the investment opportunities for tax saving?
As already stated above, the government has provided certain tax deductions on the amounts invested in specified instruments under section 80C of the Income-tax Act, 1961. The tax saving in these instruments would be Rs. 1.5 lakh per financial year and is available only if you opt for the old tax regime. Notably, those who opt for new tax regime, which offers concessional tax rates, will have to surrender many of the tax deductions and exemptions available under the old tax regime.
Meanwhile, some of the popular tax-saving instruments include Employees’ Provident Fund (EPF), Public Provident Fund (PPF), Fixed deposits (tenure of 5 years or more), Life insurance policies, Equity-linked saving scheme (ELSS) mutual funds, National Pension Scheme (NPS) and other pension plans. The investment in these tax saving things does not just go away. You are actually creating an asset that produces money and at the same time saving tax. It is notable that even if you put more money in any of the above tax saving options, your maximum deduction from taxable income will still be a total of Rs. 1.5 lakh only. However, investing in NPS can get you an additional Rs. 50,000 deduction, taking the overall tax deduction amount to Rs. 2 lakh.
What about investing in equities for the purpose of saving tax?
As far as stock markets are concerned, there are certain tax saving investment instruments where you can save tax u/s 80C of Income Tax Act and simultaneously earn handsome returns on your investment. Equity Linked Saving Scheme (ELSS) is a type of mutual fund scheme that primarily invests in equity funds and is among some fruitful schemes known as the best ways to grow your money along with saving tax.
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years (the period when you cannot withdraw your money) among all the tax-saving options under income tax rules. These schemes are known to generate good returns when one remains invested in the schemes over the long term.
Since there is no tax on gains from equity funds after a year, an investor can safely recycle his investments every three years and claim tax benefits on the reinvested amount. The best option to invest in the scheme is to take the systematic investment plan (SIP) route. This may not be possible now because you have less than three months before the 31st March deadline. At best, you can split the investment into three tranches.
Meanwhile, Unit Linked Insurance Plan (ULIP) is also considered as one of the beneficial investment options to claim tax deduction up to Rs. 1.5 lakh. Unlike a normal insurance policy, ULIPs give investors both insurance and investment benefits under a single integrated plan. A portion of the premium paid by the policyholder is utilised to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments.
What is the modus operandi to claim tax rebate by investing in bank Fixed Deposits (FDs)?
Generally speaking, all banks have a tax-saving term deposit scheme in their product baskets. Over a period of time, this bank fixed deposit (FD) instrument has become the most popular choice to stay invested and also save tax. Investment in tax saver term deposits is deemed less risky compared to investment in equities
You can open an account under this scheme with an amount of Rs 1000 and its multiples thereafter for any tenure ranging from 5 years to 10 years. However, the lock-in period is 5 year, This means you cannot withdraw the money prematurely before 5 years. Besides, you can invest a maximum of Rs 1,00,000 in a year.
(Inputs from tax experts are acknowledged)
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK