Are you yet to start investing in tax-saving instruments for FY20-21?

December 03, 2020 11:32 AM

If planned effectively, tax-saving investments can not only help us in saving taxes but can also help in achieving financial goals.

Tax-saving should not be a goal, however incidental to the broader financial plan of an individual which is aligned to one’s risk profile and financial goal.

Ideally, it is always prudent to do the tax planning at the beginning of the financial year and the investment decisions should be aligned accordingly. If planned effectively, these tax-saving investments can not only help us in saving taxes but can also help in achieving our financial goals.

However, what is ideal is not always followed and most of the people fail to do so and end up making haste investment decision eventually, to avail the income tax benefits.

But do not worry, it is not too late yet, you still have four months’ time from December 2020 to March 2021, which could give you adequate space to divide your tax-saving investments and avoid risks associated with the last minutes’ lump sum investments.

Before you start, please understand that allowances and deduction allowed to salaried and self-employed are different which are used to reduce total income and one should be cognizant of the fact that there are tax-saving expenses and tax-saving investment instruments; both are instrumental to optimise and maximise tax saving.

Tax-saving expenses like insurance premiums, children’s tuition fees, EPF contribution, home loan repayment etc let you avail tax benefit under Sec 80C. The expense incurred on health insurance premium paid for yourself, spouse, children, and dependent parents under section 80D allows one to go beyond Sec 80C to increase tax saving. Though Section 80C does offer a major tax-saving deduction, there are other sections that one can explore like 80D, 80E, 80EE, 80DD, 80G, 80GG etc. One should consult one’s tax-planners for better understanding of these sections and their applicability for oneself to save the tax outgo.

When it comes to Tax Saving Investments, there are a plethora of options. However, they can be categorised broadly into two categories; market-linked investment option like ELSS, NPS and fixed income tax saving avenues, the popular being Public Provident Fund (PPF), Voluntary Provident Fund VPF, SCSS – Senior Citizens’ Savings Scheme, Post Office Time Deposit Account (POTD), National Savings Certificates (NSC), Sukanya Samriddhi Yojana (SSY), Tax saving Fixed Deposit.

The choices between the two should be guided by your risk appetite, ability to handle volatility, liquidity requirements and minimum locking required by them. One must look at the tax treatment of the investment option and post-tax returns, to evaluate the investment avenue under consideration.

For instance, the interest income earned from a tax-saving fixed deposit is taxed at the individual’s applicable tax slab, whereas capital gains from ELSS get the same treatment as equity instruments. Short term capital gains (STCG) attract a tax of 15%, while Long term capital gains (LTCG) are only taxable if the gains exceed Rs 1 lakh during the financial year. Thus, for an individual with a 30% tax bracket; a tax saver fixed deposit (FD) with five-year lock-in having 6% interest rate will give post-tax returns of 4.2% approx. which is good to preserve capital. However, post adjusting for inflation, will not lead to wealth creation over the long term.

Remember, tax-saving should not be a goal, however incidental to the broader financial plan of an individual which is aligned to one’s risk profile and financial goal. To enable to make informed decision one should not procrastinate tax decision till the eleventh hour, resulting in hurried decisions. Begin now!

Here is the performance chart of various tax saving instruments and how they have fared over the last 10 years.

(By Anurag Jhanwar, Co-Founder & Partner at Fintrust Advisors)

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