Personal Finance

Axe your tax with smart investing

Anand Kalyanaraman | Updated on March 10, 2019 Published on March 10, 2019

Choose instruments that help meet your objectives, besides saving tax

It’s just about three weeks from the fiscal year-end (March 31). You should have ideally done your tax-saving investments by now. If you haven’t, get cracking and deploy the money before March 31. There’s a tidy sum to be saved as tax.

Specified investments/insurance/expenses of up to ₹1.5 lakh a year are allowed as deduction from your taxable income under Section 80C of the Income Tax Act. This can reduce taxes significantly — up to ₹46,800 for those in the 30 per cent tax slab, ₹31,200 in the 20 per cent tax slab and ₹15,600 in the 10 per cent tax bucket. Besides Section 80C, you can save tax under Section CCD by investing in the National Pension Scheme (NPS) under Section 80D by buying health insurance, and under Section 80G by donating money.

Don’t delay further. Scrambling at the last minute could mean getting rushed into choices not suited for you, especially when there’s so much to choose from — provident funds, bank deposits, equity, insurance, equity-cum-insurance, pension plans and more.

Also, remember that the tax-saving is just an incentive. These investments are actually meant to help you accumulate a healthy corpus for the future by saving and investing money, year after year. Most 80C investments have long lock-in periods — from three years for equity-linked savings schemes (ELSS) to as many as 15 years for the public provident fund (PPF).

Take your pick

When it comes to 80C instruments, there is no standard solution that fits everyone. Take your pick after considering your age, objectives, risk profile, and return and liquidity expectations.

If you are young with the ability and willingness to take on risk for higher returns, put some money into ELSS schemes with a good track record. Equity and related investments can give healthy returns in the long run, but it is a volatile asset class and you must be prepared for some speed bumps in the short term.

As you age and your stomach for risk moderates, you may probably be more comfortable deploying more money in safe fixed-income instruments. In this category, PPF is a very good option. The tenure of a PPF account is 15 years, but it can be extended in blocks of five years.

With 8 per cent tax-free returns currently and annual compounding, the PPF is among the best ways to build your retirement nest — making it a good option even for young investors. The interest earned and maturity proceeds are exempt from tax. The national savings certificate (NSC) is also a safe avenue to build a healthy corpus. It currently offers 8 per cent annually for a five-year tenure. The interest compounds yearly and qualifies for reinvestment under Section 80C. So, with only the last year’s interest being taxable, post-tax yields are healthy.

For those seeking to accumulate wealth without risk for the education and wedding of their daughters, Sukanya Samriddhi Yojana (SSY) is a very good investment and should be the first port of call. The interest rate is attractive (8.5 per cent currently) and compounds annually. Like PPF, it is also highly tax-efficient with tax break under Section 80C and tax exemption on interest and maturity proceeds.

But given that they compound returns instead of paying them out, PPF, NSC and SSY may not be suitable for those seeking regular flows from their investments. Retired people often seek regular returns and can consider putting money in the five-year Senior Citizen Savings Scheme (SCSS), which is also completely safe and currently offers 8.7 per cent interest annually (taxable), with pay-outs on a quarterly basis. This investment can be extended by three more years.

Those looking for regular payouts can also consider five-year tax-saving fixed deposits with banks and post offices. The interest rate on these deposits is 8-8.25 per cent currently. You can get the interest at regular intervals or choose to accumulate it till maturity. But in any case, the interest is taxable.

How much?

Funds deployed above the limit of ₹1.5 lakh will not give you tax break under Section 80C. So, do the maths when deciding on where and how much to invest. Take into account investments already made and expenses incurred that form part of the overall limit.

For instance, the amount deducted each month from your salary as your contribution toward the employees’ provident fund also qualifies for deduction under Section 80C. So does any additional contribution you make through the voluntary provident fund (VPF). Besides, the principal payment on your home loans is covered under Section 80C. Also, the premium you pay on life insurance policies or unit-linked policies (if the sum assured is at least 10 times the annual premium) qualifies for the tax break. So do the tuition fees spent by you on the school/college education of your children (restricted to two).

Deduct the sums already deployed in the above from the ₹1-5 lakh limit; you need to deploy only the balance.

Insure first

More important than investments is having sufficient life insurance for those with dependents. Premium paid on life policies is covered under Section 80C — use the window to get an adequate life cover (say, up to 10 times your annual salary). Go for cost-effective online pure term plans over traditional plans or ULIPs.

Asset allocation

Use the Section 80C instruments to complement your existing investments and build a well-rounded portfolio. For instance, you can consider ELSS for potentially better returns if your current portfolio is tilted heavily towards debt. On the other hand, if you are already invested heavily in equities, either directly or through the mutual fund route, buying an ELSS fund may not be essential. Rather, you can consider deploying money in safe debt instruments.

Retirement planning

Some of the investments under Section 80C such as PPF can help you build a retirement corpus. You can add to this by investing in the NPS, which is among the most cost-effective ways to generate regular pensions. While NPS Tier 1 investment qualifies for the Section 80C benefit, it is also eligible for tax break under Section 80CCD up to ₹50,000 a year. So, it is a good idea to exhaust the ₹1.5-lakh under Section 80C in other instruments and deploy an additional ₹50,000 in the NPS Tier 1. Here, you can choose the allocation to debt and equity as per your risk appetite.

Cover your health

Make sure you take adequate medical insurance cover for yourself and family, and also for your parents. Not only will this give you essential protection against medical emergencies, but the health insurance premium is also eligible for deduction under Section 80D. You get a deduction of up to ₹25,000 a year for the premium you pay to get health insurance for yourself, your spouse and your dependent children. This goes up to ₹50,000 if any of the policy holder is a senior citizen. Besides, if you pay the health insurance premium to cover your parents, you get an additional deduction of ₹25,000 a year; this goes up to ₹50,000 if either of your parents is a senior citizen.

Charity pays

Donations to institutions and funds approved by the government gets you deduction under Section 80G. Give money. You won’t get the benefit if you give in kind. While what you give to many government-run entities may be entirely tax-deductible, the deduction is limited to 50 per cent of the donation to most non-government entities. This tax break may be further limited to 10 per cent of your gross total income.

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