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Investing to save income tax at last minute? Here are tips
March, 30th 2015

We all wish we lived in an ideal world- a world where there are no taxes. However, the reality being quite the opposite, we need to plan our lives accordingly. For the ones who have just realized that this is the last week to invest so that you can save on taxes this year. Here are a few tips:

1. Invest in an ELSS: This is definitely one of the easier investments that one can make. However, do evaluate if it fits your risk profile and tenure before you make an investment decision.

2. Invest in PPF: One of the best bets for debt investment in the tax saving section. However, the tenure is quite long, so you must ensure that your tenure matches this product.

 

Minimum Investment (Rs.)

Lock-in years

Returns

Tax Treatment

Risk Profile

Public Provident Fund (PPF)

500

15

 

EEE

Low

National Savings Certificate (NSC)

100

5  to 10

 

ETE

Low

Bank FD

1000

5

 

ETE

Low

Senior Citizens Savings Scheme (SCSS)

1000

5

 

ETE

Low

Unit Linked Insurance Plan (ULIP)

25000

10 -15 (Tenure of policy)

Market-Linked

EEE*

Medium

National Pension Scheme (NPS) - Tier 1

6000

Till retirement

Market-Linked

EET

Medium

Equity-Linked Savings Scheme (ELSS)

500

3

Market-Linked

EEE

High

 

 

 

 

 

 

 

 

 

 

 

 

 

3. Invest in a 5 year bank FD: It is convenient and easy to invest in this. However, this product makes sense only if you are in the lower tax bracket. The interest on this is taxable.

* EEE stands for exempt, exempt, exempt. Here, the first exempt means that your investment is allowed for a deduction. So, you don’t have to pay tax on part of the salary that equals the invested amount. Similarly, the second exempt implies that you don’t have to pay any tax on the returns earned during the accumulation phase. The third and final exempt means that your income from the investment would be tax-free in your hands at the time of withdrawal.


ULIPs fall under EEE only on fulfilment of certain criteria. Please consult your financial advisor before investing.

But before you jump off your seat to start investing, check what your PF contribution has been- this is also a part of investments under 80C. The only reason this has been taken care of is because it was compulsorily deducted from your salary by your employer- so you’re that much better off today- you need to invest that much lesser.

If you have existing insurances, those premiums are also deductible under Sec 80C. Yes, the policies you took last year but are paying premiums every year (Disclaimer: This is valid only if you have paid your premiums this year)

Although there is a list of things that you can do, below is a list of things you shouldn’t do:

1. Take an insurance policy: If you’re in a rush to save taxes, don’t opt for insurance- this decision needs time and consideration and must not be taken in a hurry.

2. Do the same next year.

If your tenure is long term and your risk appetite allows you exposure to equity, you can create a corpus alongside the fixed income retirement portion raised by statutory deductions.

How? At the beginning of every year, estimate the amount you have left over from the Rs 1.5 lakh limit after statutory deductions (EPF), divide it by 12 and start an SIP.

Why? Benefit from EEE – Investment is tax deductible, returns during accumulation phase is tax free, investment is tax free on withdrawal.

They have a shorter lock in period (of 3 years) than comparable alternatives.
Wheel effect – Suppose investments are made in the first three years, in the fourth year, the first year’s ELSS investment which is now tax free can be redeemed and re-invested as a fresh investment on which deductions can be claimed. This long-term cycle frees you from making any fresh investment after the initial three years.

Risk: Being linked to the equity markets could create volatility in the returns/value of the corpus invested.

Before you start planning next year’s taxes, do take a look at your overall finances, goals and insurance. Think before you sign those investment cheques next year and start planning from April onwards so you don’t find yourself in this situation again!

 
 
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