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Acting now could at least help you save some TDS outgo

Sandeep Shanbhag

With December almost coming to an end, we have just three months left to finalise our tax planning. Most of those employed have even lesser time since by now the payroll department would have indicated the last date before which any tax saving 

investment needs to be reported for the same to be accounted for in TDS calculations. The following is a quick end-of-the-year review of the most optimal tax saving investments.

Mediclaim: Sec 80D

A tax deduction up to Rs 15,000 is allowed in respect of medical insurance premiums paid by an individual. For a senior citizen, a higher deduction of Rs 20,000 is available. For premiums paid for parents, additional deduction up to Rs 15,000 (Rs 20,000 if the parent(s) are senior citizens) is available.

Medical insurance is a non-compromisable expense especially in a country like ours, where the state does not cover medical costs. Everyone, young or old, male or female, salaried or a business person, should without exception get medical cover for himself/herself. Else, if and when an emergency strikes, apart from health consequences, the repercussions on your finances could be disastrous. Of course, if you are salaried, more often than not, the employer arranges for medical insurance. Here, too, most aren’t aware of the exact amount of coverage. Ideally, have a family floater policy for a minimum amount of Rs 5 lakh. The premium for a family of four, comprising husband, wife and two kids, would be in the region of Rs 8,000-8,500 per annum.

Housing loans: Sec 24

Even if you have the money to buy a house outright, you should opt for housing finance. Home loans are one of the cheapest forms of loans available. On the first house, interest up to Rs 1,50,000 is tax deductible. For the second house, the entire interest without any limit is eligible for tax deduction.

Sec 80C

Over the past few years, the government has steadily whittled down tax exemptions available to the common man. Standard deduction is no longer available to salaried employees. All perks, almost without exception, are taxable. Those that aren’t, have been brought under the ambit of fringe benefit tax (FBT). As FBT is payable by the employer, in effect, those perks too have ipso facto disappeared.

Now the only meaningful deduction left is Sec 80C under which, investments up to Rs 1 lakh made in certain specified instruments can be reduced from your taxable income. There is a long list of eligible investments including an employee’s provident fund contribution, tuition fees paid for children, principal portion of housing loan installments, investments made in Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificates (NSC), Senior Citizen Savings Scheme, Post Office Term Deposits, life insurance premiums paid, etc.

Using 80C optimally

As you can see, for claiming the Sec 80C deduction, an investor is basically spoilt for choice. So how should one choose from amongst the various options available?

First take into account the mandatory payments like provident fund, housing loan EMIs and tuition fees if applicable. Reduce the total amount spent from the Rs 1 lakh limit. Distribute the balance in a combination of ELSS and PPF. If you are relatively young and just starting out, put 70% into ELSS and 30% into PPF. As you advance, lower the ELSS and increase the PPF, eventually reaching a 30% ELSS and 70% PPF combination.

Why PPF? Well, PPF is the best fixed income investment that you can make. An annual contribution of Rs 70,000 will get you around Rs 32 lakh in 20 years. Look at it as a fund for the education needs of your children. If your children don’t need it, get your spouse to invest too and you would have a retirement fund ready.

An ELSS is nothing but an equity mutual fund that offers a tax deduction. On account of the tax deduction, there is a lock-in of three years on the investment. This lock-in enables the fund manager to take long-term calls on the market, which is essential for any equity investment. ELSS investments are the most preferable way of building long-term wealth. However, this investment comes along with the inherent risk of the stock market. This is why the proportion of ELSS in your total tax-saving investment should come down as age advances and the risk taking ability declines.

Looking ahead

Next year being an election year, the annual Budget will, in all probability, be a vote-on-account. No major changes are expected at that time. The freshly elected government will then be expected to present the Budget sometime in July or August. Whether or not any change takes place at that time, the basic principles of investing remain the same.

Therefore, next year, instead of waiting till the fag end, start by investing in tax-saving avenues in the very beginning of the financial year, even April 1. Doing so has two advantages. First, your tax-saving investments would earn a return from the beginning of the financial year (April-March). Secondly, often, many end up simply not having the lump sum required at one go for 100% tax saving. However, realise that there is no compulsion for making tax-saving investments towards the end of the year.

A much more efficient strategy would be to invest throughout the year in a staggered manner such that by the time the year comes to an end; full advantage of the tax-saving opportunity is taken. And don’t worry about how much or little you save each month. As Benjamin Franklin has so succinctly put it, “A penny saved is a dollar earned!”

sandeep.shanbhag@gmail.com