It is during the months of January and March when taxpayers generally pick up the tax savings exercise. In the haste to complete this workout just before the end of financial exercise, they may end up making mistakes. In this context, experts suggest that the best time to start the tax-saving process is the beginning of the financial year. An early start also allows investments to compound and can help in achieving long-term goals.
In the last-minute rush, investors may invest in a product without considering the pros and cons properly. It is advisable to plan savings in such a way that can reduce the income tax liabilities.
(Also read: Investment options you should remember to lead a tension-free retired life )
How early one can start the tax-saving process
According to Archit Gupta, Founder and CEO, Cleartax, one should try to get a good idea about their monthly income (inflow) as the financial year begins and set some tax-saving goals.
Investors can put aside money on a monthly basis to make tax-saving investments, or set up an auto debit for a Systematic Investment Plan (SIP) to invest in an equity-linked saving scheme (ELSS), which can be as small as Rs 5,000 or Rs 10,000 a month.
“If an investor prefers to park a lump sum, he/she must finish this process in the month of April itself or as soon as the new financial year begins,” Gupta explains. If one is committed to investing in a Public Provident Fund (PPF), he/she must do it early to make sure the minimum deposit is not skipped.
Usually, once anyone get the hang of what he/she needs to do, it can be consistently followed year after year.
(Also read: Key things to know about tax saving mutual funds )
What are the investment options that ensure tax savings
There are several ways by which an investor can reduce the income tax liabilities and save more. According to tax experts, investors can consider instruments that earn deductions under Section 80C and Section 80D.
"Focusing on exhausting the 80C limit, making decisions about opting for a health insurance and choosing well thought out products and following through this process year after year is the best example of a well-arranged financial plan," according to Gupta.
Taxpayers can avail tax deductions of up to Rs 1,50,000 a year by investing in any of the options covered under Section 80C of the Income Tax Act, 1961.
Sandeep Sehgal, Director-Tax and Regulatory, Ashok Maheshwary & Associates LLP, however, states, “Ordinarily, there are no specific expenses/investment for which deduction is allowed under Section 80C of the Income-tax Act, 1961. However, taxpayers can choose to pay some of those on a recurring basis.”
"Taxpayers comfortable with investing in equities can look to invest in ELSS of mutual funds through monthly SIP modes in which they would be investing some fixed amount on a monthly basis," he adds. ELSS offers tax deductions under the provisions of Section 80C.
Taxpayers comfortable with investing in debt schemes can invest in Public Provident Fund (PPF) through recurring bank mandates. PPF offers an EEE (Exempt-Exempt-Exempt) tax status. The maturity amount and the overall interest earned during the period of investment are tax-free.
"Same can be done for several insurance policies, which also have the option of making monthly or quarterly contributions.” Sehgal explains.
One can buy a medical insurance and claim deduction up to Rs 25,000 for medical insurance premium under Section 80D.
On home loan, investors can claim deductions on the principal amount repaid to the lender under Section 80C. Moreover, even the interest paid to the lender is eligible for deductions under Section 24.
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