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With the beginning of the new financial year, the best financial decision you can take right now is to plan your taxes in advance. Don’t wait for the last minute to make tax-saving investments. Let’s say, you make an investment on 29th March in 2018 via cheque or online payment, but the payment fails due to some reason. You wouldn’t have enough time to rectify your mistake as the new financial year would have already begun and as a result, you will end up paying higher taxes. Planning in advance also ensures that there is no undue financial burden in the FY end.
Pre-planning your taxes is an important part of financial planning to reduce your tax liability by availing all the tax deductions and exemptions available for you. It will not only help you to save taxes, but also give your investment enough time to grow. In fact, you can also reinvest the returns to leverage benefit of compounding. So, if you invest in PPF or any other instrument between April-May, you can earn interest for practically the whole year as compared to one to three months when done between Jan-March.
A timely tax-planning also gives you an opportunity to review your previous investments, study the new investments in detail and whether they are meeting your financial goals. If required, you also get ample time during the year to modify your investment.
Here are a few major tax-saving investment options for you to consider for FY 2017-18.
Public Provident Fund (PPF)
PPF is the most popular tax saving investment option in India. A PPF account can be opened in any designated post office or a bank to claim a deduction under section 80C of the Income Tax. A maximum amount of Rs. 1,50,000 can be deposited in a year and a minimum of Rs. 500 needs to be deposited every year to keep the account active. Currently, PPF is offering an interest of 7.9% per annum. The lock-in period in PPF is 15 years, which can be extended by 5 years at a time. However, you can only partially withdraw money from PPF only after 5 years.
Equity Linked Saving Schemes (ELSS)
They are basically the equity linked mutual funds wherein the investment is made in equity or shares. If you have a long-term horizon and have an appetite for market based returns, ELSS is definitely a good option. The lock-in period is 3 years and a maximum Rs. 1,50,000 can be claimed as deduction under section 80C for one financial year. You can opt for dividend or growth option depending upon your regular income flow and the income receivable from dividends is also tax free. Even, the long-term capital gain on the redemption of ELSS is not taxable. Hence, ELSS makes a sound investment for those looking for long term savings with higher and tax-free returns.
Tax Saving Fixed Deposits
This is another variant of regular bank FD that comes with a 5-year lock-in period and provides a tax deduction under 80C in the year of investment. These FDs offer a higher rate of interest (0.25% to 0.5% more) than the regular FDs. However, the interest earned on tax-saving FDs is taxable as regular income on a yearly basis. Also, you cannot withdraw money from these FDs before the end of 5 years, not even by paying the penalty. Hence, tax-saving FDs are more suitable for the people with lower tax bracket i.e. 10%. Otherwise, the post-tax returns are lower than other investment options.
Life insurance Premium
Any premium paid towards any life insurance policy (ULIP, endowment, term, money-back) is eligible for deduction under section 80C. Even the maturity and death benefits receivable are tax free in the hands of the investor. Hence, the investment in life insurance policies provides you protection against life risks along with the tax savings.
Ideally, you should opt for term insurance policy as it is the purest form of risk cover. Though there is no capital gain or maturity benefit, it offers a large coverage at a lower premium. The amount you saved on paying higher premium on other policies can be utilized towards buying mutual funds which give good returns over a period of time. In fact, a good financial advisor will always recommend a combination of term insurance and mutual funds.
National pension Scheme (NPS)
NPS has been emerging as a popular investment option for retirement planning as well as tax purposes. You can save additional RS 50,000 by making an investment in NPS under section 80CCD (1b). However, you cannot withdraw any money from NPS until the age of 60 years and 40% of the maturity proceeds should form part of the annuity.
Principal Repayment of Home loans
The principal amount of a home loan repaid in the financial year is eligible for deduction under section 80C. Even, the interest paid on a home loan is also eligible for deduction under section 24 up to an extent of Rs. 2,00,000. Further, if the house is owned jointly then, both the owners can claim deduction separately up to the maximum limit.
Deduction under section 80D
Over and above section 80C investment, you can also claim deduction of Rs. 25,000 on the premium of a health insurance policy under section 80D. Additional deductions are available for senior citizens and very senior citizens.
Here is a comprehensive table showing various income tax sections and related investment options to do an effective tax-planning.
| Income Tax Section | Deductible Amount | Tax Saving Schemes |
| Section 80C | Limit: Rs. 1,50,000 | * Public Provident Fund (PPF)* Employee Provident Fund (EPF)* Principal Repayment of Home Loans* Fixed Deposits (FD) and National Saving Certificates (NSC)* Life Insurance Premium (ULIPS, Term and Endowment)* Equity Linked Savings Scheme (ELSS)* New Pension Scheme (NPS) Sukanya Samriddhi Account Deposit |
| Section 80D | Limit:* Rs. 25,000 for non-senior citizens (self, spouse and dependent children) * Additional Rs. 30,000 for senior citizens (attained 60 years of age) * Further Rs. 30,000 very senior citizens (above the age of 80 years) | Health insurance premium in case of non-senior and senior citizens Medical expenditure only in case of very senior citizens as they can’t avail health insurance |
| Section 80DD | Limit:* Rs. 75,000 for 40% disabled dependents* Rs. 1,25,000 lakhs for dependents with severe disability (Dependents include spouse, children, parents & siblings) | Medical treatment |
| Section 24B | Limit:* Rs. 2,00,000 for a self- occupied property* No upper limit for a property that is let-out. | Interest on home loans |
| Section 80EE | Limit: Rs50,000 | First time home buyers |
| Section 80E | No limit | Interest on the educational loan for higher studies for self, spouse or children |
| Section 80GG | Limit: Rs60,000 | Individuals who do not own a residential house and do not receive HRA |
| Section 80G | Subject to terms and conditions | Donations to charitable institutions and relief funds |
| Section 80TTA | Limit: Rs10,000 | Interest on deposits in a savings account with a bank, co-operative society or post office |
| Section 10(10D) | Sum assured should be equal to 10 times | ULIPs, Term, Endowment and Moneyback Plans* Maturity Benefit/ Death Benefit/ Surrender Value* Sum allocated by way of bonus |
Pre-planning your taxes can save you from hasty decisions and financial mistakes. Don’t postpone it for some other time!
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