Most salaried employees are running around to make last-minute
investments to save income tax and provide the proof of investments to the
employer. This is because most companies ask their employees to submit the
proof of their investments in January to avoid deduction of higher taxes from
the salary.
Last minute tax planning is an age old practice that forces
tax payers to make hasty, and often wrong, decisions. Typically, some
individuals invest more than the required amount to save taxes. They also end
up parking money in wrong products in the process, which may have an adverse
impact on their cash flows and return prospects.
It is not surprising that the insurance industry do most of
its business during the tax- saving season between January and March every
year. "Often we tend to buy products or make investments without doing the
due diligence on our total tax structure.
Having a tax plan in place at the start of the financial year
will help you make better decisions and even reduce the burden on financials at
the end of the financial year," says Nitin Vyakaranam, founder & chief
executive officer, Artha Yantra, a financial planning firm.
A SMALL 80 C BASKET
Tax planning is all about Section 80 C for many individuals.
They believe they are claiming all tax break if they invest Rs 1 lakh in some
of the usual investment tools like public provident fund, national savings
certificates, tax planning mutual fund scheme and so on.
But what tax payers don't account for is the employees'
contribution to provident fund, children's school tuition fees and the
principal repayment of housing loans also qualify for tax deduction under
Section 80 C, which is capped at an overall limit of Rs 1 lakh.
If you invest
anything over and above Rs 1 lakh in ELSS, life insurance, PPF or NSC, it does
not give you an extra tax benefit. It is just that your money gets locked in
for a certain period which can range from 3 to 15 years in the above mentioned
products.
For example, EPF contribution and life insurance premiums are
covered under Section 80C apart from the principal repayment of housing loans.
That means most regular employees can invest only a few thousands extra under
Section 80C.
For example, if your
EPF contribution is Rs 5,000 per month, it would exhaust more than half of
Section 80 C. Add your life insurance premium and you will know how little you
can save under the section.
"Typically, your existing investments would include your
contribution to EPF, life insurance premiums, housing loan repayment, stamp
duty and registration fees paid, children tuition fees, etc.
If the sum of all these exceeds Rs 1 lakh, then you don't
need to invest further as the deduction is capped at Rs 1 lakh," says
Vaibhav Sankla, director, H&R Block, India. However, if the sum of your
tax-saving investments is less than Rs 1 lakh, then you may consider investing
the balance amount for additional tax benefits.
For example, if your existing investments are to the tune of
Rs 60,000 then you can still make additional tax saving investments of Rs
40,000 (Rs 100,000 minus Rs 60,000).
"But the tax saving on the additional investment would
be Rs 4,000 only. In such cases, many tax payers would rather opt to pay income
tax of Rs 4,000 than blocking Rs 40,000 in a tax-saving scheme," says
Sankla.
