Personal Finance

Invest early to save tax

Anand Kalyanaraman | Updated on April 01, 2018 Published on April 01, 2018


The new financial year 2018-19 has just started. This is the best time to make your tax-saving investments. This will help you gain more than just saving tax.

Early benefits

The early bird gets more worm. An early investment starts earning returns sooner and helps you benefit from compounding. Say, at the beginning of the financial year in April, you invest ₹1,50,000 (the maximum amount qualifying for tax deduction under Section 80C) in your public provident fund (PPF) account.

The rate of interest on the PPF currently is 7.6 per cent a year.

Assuming the rate remains the same throughout the year, you will earn ₹11,400 on the PPF investment by the end of the financial year next March. Next year, if the rate stays the same, you will earn 7.6 per cent interest on the cumulative amount of ₹1,61,400. The cumulative sum at the end of two years will be ₹1,73,666.

In contrast, if you invest ₹1,50,000 in PPF only in February 2019, your accrued earnings by the end of March 2019 would only be ₹1,900. The total (₹1,51,900) at, say, 7.6 per cent next year will cumulate to ₹1,63,444 at the end of two years, much lesser than what you would get if you had invested early.

If you have surplus funds, consider deploying them in tax-saving investments as soon as possible.

Even regular periodic investments in tax-saving avenues would be financially more beneficial, than waiting to invest till the end of the year.

Earn more

Investing early will also help you earn more. When you make the tax-saving investment, your employer will consider it in your ‘tax deduction at source’ (TDS) calculation.

This will reduce your monthly tax, which can be invested to earn more over the year.

If you are in the 30 per cent tax slab, an investment of ₹1,50,000 in a tax-saving instrument will result in a tax-saving of ₹46,800 for the whole year.

That’s ₹3,900 a month. If you invest in the beginning of the year in April, your monthly tax outgo from April onwards will be lower by this amount.

You can deploy this monthly saving in other investments, which offer say 7 per cent. This will earn you around ₹1,800 over the year.

Key dates

You have to deposit in the PPF by the fifth of a month to earn interest for the month. So, to make the most of your PPF investment, deposit money by the fifth of April.

Similarly, deposits in the Sukanya Samriddhi Yojana until the 10th of each month are eligible for interest for that month. So, put money in the account by the 10th of April.

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