Despite growing awareness about tax planning, a significant number of individuals still procrastinate until March 31st to make their tax-saving investments. However, this approach often results in rushed decisions and missed opportunities. To prevent such scenarios, it’s essential to plan ahead and strategise your tax-saving investments well in advance. This detailed guide provides comprehensive insights and practical examples to help you avoid the pitfalls of last-minute tax-saving decisions.
Also Read – What is Tax?
Know your Current Section 80C Investments:
Prior to initiating new investments, assess the extent to which your Rs 1.5 lakh limit under Section 80C has already been utilized. Your employer typically considers your Employee Provident Fund (EPF) contribution when calculating your tax liability. Moreover, expenses like tuition fees, life insurance premiums, and Public Provident Fund (PPF) contributions are eligible for deduction under Section 80C. For instance, if you earn Rs 10 lakh annually and have an existing EPF contribution of Rs 1 lakh for the financial year, along with annual tuition fees of Rs 20,000, only Rs 30,000 (Rs 1.5 lakh – Rs 1 lakh – Rs 20,000) remains from your 80C limit for additional tax-saving investments.
Suitable options to invest under Section 80C
When picking tax-saving options under Section 80C, it’s crucial to align them with your financial goals, risk tolerance, and investment timeline. ELSS mutual funds have a shorter lock-in period of just 3 years but involve market risks. On the other hand, PPF and NPS have longer lock-in periods of 15 and 60 years respectively, but they offer assured returns.
Don’t just think about saving taxes, think about what’s right for you
Be careful not to buy life insurance policies you don’t really need just to save taxes. Some of these policies tie up your money for a long time and might not fit with your plans. Also, think about how long you’ll have to keep your money locked in different tax-saving options before you decide. For example, if you’re a young professional saving up for a car in two years, it wouldn’t make sense to put your money in a PPF account that you can’t touch for 15 years. Instead, you might consider investing in an ELSS mutual fund, which lets you take your money out after just 3 years, although remember these investments come with some risk because they’re linked to the stock market.
Get enough health insurance, don’t just get the minimum
While you can save taxes by buying health insurance under Section 80D, it’s really important to make sure you have enough coverage for yourself and your family. Don’t just buy a policy because it helps you save taxes; make sure it’ll actually cover you if you need it. Look for a comprehensive health insurance plan that covers everything you might need, like hospital stays and surgeries, for yourself, your spouse, your kids, and even your parents. You can even pay for up to 3 years of health insurance in advance to lock in your rates, but remember that you can only claim the tax deduction for each year you’re covered.
Under Section 80D, you can get a tax deduction for paying up to Rs 25,000 in health insurance premiums for yourself, and an additional Rs 25,000 for your parents (or up to Rs 50,000 if they’re senior citizens). But if this coverage isn’t enough to cover all your medical expenses, you might still have to pay a lot of money yourself, even with the tax benefit.
In conclusion, tax planning plays a vital role in managing one’s finances effectively. By proactively strategizing and making informed decisions about tax-saving investments, individuals can optimize their tax liabilities while simultaneously working towards their financial goals. It empowers individuals to take advantage of available tax deductions and incentives, thereby preserving more of their hard-earned income. Additionally, tax planning fosters financial discipline, encourages long-term wealth accumulation, and ensures a secure financial future. Overall, incorporating tax planning as an integral part of financial planning is crucial for achieving financial stability and success.
