As the financial year-end draws closer, you may be scurrying to make investments to claim tax benefits under section 80C of the Income Tax Act. If you have not planned during the year, there is a high possibility of investing your money in unsuitable products.
Investments should never be ad-hoc decisions and must suit your personal needs and financial goals. However, with the accounts department of your company asking for investment proof, you may rush into incorrect decisions.
There are few tax planning tips that not only reduce your liability but also help save for your financial goals. Here are five important things you must consider before making fresh investments under section 80C.
What is the total tax deductions under section 80C and others?
When asked ‘’How much tax can be saved?” You may claim a maximum deduction of INR 1.5 lakh per annum in various tax-saving investments. Some of the eligible products include Public Provident Fund (PPF), Equity-Linked Saving Schemes (ELSS), National Savings Certificate (NSC), Employee Provident Fund (EPF), National Pension System (NPS), and many more. Additionally, expenses like children’s tuition fees, home loan principal repayment, and others are eligible for section 80C benefits.
From the financial year, 2015 -16 an additional deduction of INR 50,000 invested in NPS is eligible under section 80CCD (1B). Furthermore, an amount of up to INR 25,000 (if you are less than 60 years) paid, as health insurance premium is tax deductible under section 80 D. The interest paid on home loan is eligible for tax benefits under section 24. Other benefits include education loan interest under section 80E and charitable donations under section 80G.
Is Additional investments required?
Before you start blocking your funds in tax-saving investments, it will be beneficial to understand if this is actually necessary. Consider the non-80C deductions like interest on education loan, health insurance plans, charitable donations, and home loan interest. Furthermore, consider non-investments such as children’s tuition fees, term insurance plan premium, and home loan principal repayment. You may also have existing commitments such as PPF, NPS, or endowment policies.
After reducing all the aforementioned, your net income exceeds INR 2.5 lakh, then you may do tax planning through eligible investments. If your section 80C investment limit of INR 1.5 lakh is not exhausted, evaluate and analyze the options to make the right investments.
Tax implication on earnings
Before you invest in one or more of the section 80C investments, consider the potential returns and tax implications on these. Fixed-income investments like NSC offer good interest rates; however, the entire income is taxable. Therefore, the actual post-tax return may be insufficient to combat the inflation rate. Among all investments only PPF, ELSS, and EPF offer exemption on the principal, income, and maturity proceeds.
Type of tax saving instruments.
Section 80C investments are either fixed-income or market-linked products. The former include endowment plans, NSC, PPF, and tax saving fixed deposits (FDs). These offer fixed returns that may just be able to match the inflation rate. If you are a conservative investor, then these investments are your best options.
Market-linked instruments include NPS, ELSS, Unit-Linked Insurance plans (ULIPs), and pension plans. There are no fixed returns but have the potential to deliver exceptional returns when the market performs well. Often, when these investments are held for the long-term, you are able to earn inflation-beating returns.
When you look for tax-saving tips, you need to consider the lock-in period of the various investment options. The minimum lock-in period is three years if you invest in ELSS funds. NPS is locked in until you reach the retirement age. PPF comes with a 15-year lock-in period while tax-saving FDs have a lock-in period of five years. You need to consider your personal financial objectives before you make an investment decision.
Making the right choice
It is important to consider your medium and long-term goals before making any investment decision. Additionally, you must determine your tax slab to understand the post-tax returns on these investment products. Investing in long-term instruments that deliver lower post-tax returns do not combat inflation and must be avoided. Similarly, market-linked products like ELSS require a longer holding period to deliver higher returns.
Knowing the tax-saving tips is not sufficient. You must make the right investment decisions to maximize your returns. This requires an in-depth analysis and evaluation. You may not have the expertise to conduct detailed research. ARQ, our technology -driven investment engine does the research for you. It analyzes over a billion data points to match the best products to your financial goals and risk appetite. ARQ uses advanced algorithms to conduct the analysis eliminating all human bias to offer customized recommendations.