Tax Saving Options – How to best take advantage of tax saving options under the old tax regime

It is that time of the year again when many of us rush to make last-minute tax-saving investments before the close of the financial year. HR departments at companies ask for investment declaration proofs without which tax paying employees will see tax getting deducted from their salaries at an accelerated pace. To save tax, many avail deductions available under two main sections of the Income-tax, 1961– section 80C and section 80D. There are other sections as well under which one can claim tax relief.

What are the available options?

Under section 80C, one could claim deductions for up to Rs.1.5 lakh in a financial year. The tax-saving options available in the 80C basket include life insurance premium, principal payment portion of a home loan, investments in five-year tax-saving bank fixed deposits (FD), National Pension System (NPS), Public Provident Fund (PPF), National Savings Certificate (NSC), Sukanya Samriddhi Yojana, ELSS etc. Under this umbrella, the basic tuition fees paid for up to two children studying in a school or college also is eligible.

Further, medical insurance premium up to Rs 25,000 (for the family including self, spouse, dependent children etc.) in case of regular citizens and Rs 50,000 in case of senior citizens is available as a deduction. Also, one can take the cover for parents and claim deduction. One can also claim Rs 5,000 for preventive health checkup under the overall eligible deduction. Do note that if you are unable to buy medical insurance for your senior citizen parents, then you can claim deduction for medical expenditure incurred during the financial year under section 80D of the Income-tax Act.

Apart from this, for those who are investing in NPS can invest Rs 50,000 and get a deduction over and above the section 80C limit of Rs 1.5 lakh under section 80CCD (1b).

There are deductions available for interest paid on home loans limited to Rs 2 lakh, full deduction on interest paid on education loans, 50% deduction (in most cases) on contributions to registered charities etc. Beyond this, one can get a set off on rent paid as per a one-in-three formula, provided HRA is part of the employee’s salary.

Taking advantage of these options

Tax planning is an integral part of financial planning. One should invest in options that are aligned with their money goals and objectives that can incidentally save taxes too. For instance, if one is investing for the long term and has a low risk appetite, then investing in PPF may be a great option.

Most people look at investments for tax savings in exclusion. That is a serious error, and one may end up with products not suited to one’s situation.

Also, many people invest in the wrong products (like traditional insurance plans) as they just want something that will qualify for a tax rebate. If one buys traditional insurance plans or endowment plans, it is seldom a one-time affair. Premiums must be paid on an ongoing basis in the future as well. Hence, one may be taking on a monetary commitment for future years, without adequate thought.

Tax savings should not become an obsession

For many, tax savings is an obsession. They would even borrow to make investments for saving tax. Sometimes, it may just be best to pay the taxes and not lock up the funds. This may especially be true when the surplus amount is small, and one may need them for various expenses or goals. Also, effective from FY 2020-21, an individual can opt for the new tax regime having lower tax rates by foregoing approximately 70 tax deductions and exemptions. Thus, if you have low surplus amount to make fresh tax-saving investments, then as a salaried person you can opt for the new tax regime.

Top 10 tax saving investments: Returns, ranking, pros & cons

​Best ways to save tax

While taxpayers rush to complete their tax planning for the FY ending March 31, 2022, we have tried to simplify matters for them with information on the best tax savers. The following 10 tax-saving instruments have been rated on eight key parameters— returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income, with each receiving equal weightage.

ELSS funds are the clear winner at number 1 and traditional life insurance policies rank last. Here are the top 10 tax saving avenues to help you choose the best for yourself.

Tax savings is not a year-end affair

It is normal to find people scrambling at the end of the year to save tax. They start looking at tax saving options, when their finance team is behind them to submit proof of investments. The merits and suitability of the investment itself becomes secondary; what becomes important then is how soon can one get the proof of the investments made.

This is how many people lay the foundation for a lifetime of chaos and a product jungle.

As mentioned above, tax savings is an integral part of financial planning and needs to be well thought through and investments need to be done well ahead of time. This will ensure that one does not have to rush through this process without proper thought.

Such investments should not be recycled

The objective of any investment is to build wealth and tax savings too, should be used towards that end.

However, we find that many people take out the money they have invested earlier after the lock-in period and reinvest the same to save taxes for the current year. For instance, ELSS investments made three years back can be taken out now and invested in the current year for tax savings.

The other thing that we find is a compulsiveness to take out the money after the lock-in period. For instance, people want to cash out their ELSS investments after three years and invest it elsewhere. If the investments are in the right place and is doing well, there is no need to change it. We need to understand that even tax saving investments is an investment whose value goes beyond just tax savings.

There are different heads under which tax savings can be done today. As mentioned earlier, we need to choose what is appropriate for us and avail of that tax savings option only. Doing this right will ensure that both the objectives of investments and tax savings will be met. Anyway, the plethora of tax saving options and the resultant complexities are being sought to be removed by the government in the future. It will result in a simpler, less chaotic investment portfolio for most, which is a good thing.

(The author is Managing Director & Principal Officer, Ladder7 Wealth Planners. A SEBI Registered Investment Advisor.)

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