For the tax planning exercise to bear fruit for you as reduced tax liability for FY18, it should actually have been a year-round process as any last-minute investment decision to save tax can be an impromptu attempt. Also, you need to ensure that your tax planning efforts and financial goals go hand in hand.
So, to help you with your tax planning at the fag end of the financial year, here is a quick ready reckoner which if understood and adhered to will not only save tax for you but also help you accomplish or reach your different financial goals.
1. Know deductions that you can avail on your gross total income:
In order to promote savings and investments as also for some outflows, tax deductions under different sections of the Income Tax Act are available to a taxpayer.
Section 80C: Under this section on the gross total income, deduction of a maximum of Rs. 1.5 lakh annually i.e in a financial year, can be availed against investment in different eligible investments and for some of the expenses. Investments covered under 80C include insurance premium, NSC, PPF, ELSS. In respect of the expenses, tuition fee, home loan principal repayment amount etc are accounted for.
Section 80CCD: After you are exhausted with the 80C limit, you can lap up the National Pension Scheme for the added tax rebate or deduction of upto Rs. 50000 as per this section which came into effect from 2015-16. The instrument with defined contribution towards equity and debt will help you plan for your retirement needs.
Section 80D: Tax benefit can also be availed for the health insurance premium paid for self and family for Rs. 25,000 and Rs. 30000 in case of individuals aged above 60 years.
Section 80E: If you have taken an education loan, you can claim deduction against the interest payment
Section 80G: For any of the donations made to any trust etc that are allowed as per IT Act
Section 24: Deductions can be claimed for interest payment on a housing loan
2. Evaluate the need to make fresh investments for tax-saving:
Before scouting for the best tax-saving option for you, you need to assess your running investments as also different outflows for which deduction would be allowed both under 80C and non 80C.
This way you will be able to reach at the combined figure of the deduction available to you. Deduct this amount from your gross total income for this financial year to arrive at the taxable income and in a case if it exceeds the tax-exemption limit of Rs. 2.5 lakh, here is where you need to take call for effective tax planning.
3. Base your fresh investment decisions on investment goals and risk appetite:
In the 80C kitty which can be looked upon if the cap for allowed deduction is not reached in it, investors depending upon their say such as whether they want to secure their capital or make wealth out of it can choose between equity or fixed income product line.
Within the equity space that provide market linked returns and are capable of providing inflation-adjusted higher return in the longer run are offered ELSS scheme, pension funds, NPS and ULIPs. While the fixed return debt asset class provides return tracking rates in the economy at par with inflation rate. And the various instruments under the category include PPF, NSC, tax-saving deposits, SCSS.
4. These investments enable tax-savings but tax implication on return from these instruments have to be accounted :
Do note that of the several tax-saving options, only EPF, PPF, insurance schemes , ELSS mutual funds qualify for EEE status i.e tax exempt status in respect of investment made, interest earned and maturity proceeds. Considering this some of the assets for tax-saving fail to offset inflation as is the case with 5-year NSC Post Office scheme.
5. Time duration of various tax-savers is mid to long term:
While some of the insurance plans may even go beyond 15 years time frame when tenure is talked about. Others such as ELSS have a lock-in of 3 years, NSC and 5-year tax saving deposits come with a tenure of 5 years and PPF is a 15-year product.
So your mid to long term financial goals should have a bearing on your prudent tax-planning. Note that if you choose taxable instruments like the likes of NSC, tax-saving deposits, SCSS etc. do evaluate the post-tax returns considering the tax bracket you fall in as lower returns may be a big dampener.