Article

Tips to Make Wise Tax Saving Investments

29 Nov 2019

The Income Tax Act gives adequate options to save tax and the onus is on the tax payer to work out how to make wise tax saving investments. The traditional approach to tax saving was to rely on products like PPF, LIC and NSC. Today, there is a wider palate on offer and you make a choice of products that fit into your unique requirements. Here are 5 tips to make wise tax saving investments.

Tax investments must also fit into your financial plan

This is a common mistake. We treat tax saving and financial investments as two discrete activities. Actually they are related. For example, when you buy PPF or NSC for tax saving, that increases your exposure to debt. When you work out your debt / equity mix, these must also be factored. Similarly, ELSS is part of your equity exposure and must fit into your overall equity mix in the financial plan. Your financial plan should still be the primary document and any tax plans must fit into that.

ELSS funds have multiple benefits  as tax saving instruments

Tax saving mutual funds or ELSS funds can be value accretive to your finances in multiple ways. For example, the lock-in period on ELSS funds is the lowest at 3 years among all the Section 80C investments. In comparison, PPF has a 15 year lock in while ULIPs and Long term Bank FDs have a 5 year lock in. Secondly, even as you save tax, you are also creating wealth through equities. That is an advantage no other Section 80C investment offers. Of course, ULIP has an equity component but the loading is too high.

Adopt the SIP approach for tax saving mutual funds

It is general practice to make a last minute rush for tax saving instruments but that could put pressure on your finances. A better way would be regular tax saving. For example, if you have decided that you want to invest Rs.1 lakh in ELSS funds during the year, convert that into a SIP of Rs.8000 per month. This has two benefits. Firstly, it synchronizes your outflows with inflows so you don’t feel the financial pressure pinching you. Secondly, you get the benefit of rupee cost averaging. As you spread your SIP mutual funds, you get the best of market volatility in your favour.

Make the best of health insurance benefits for your family

The health insurance premium that you pay is exempt up to a contribution of Rs.25,000 for yourself and your family. If you are also insuring the health of your parents (being senior citizens), your actual tax exemption can go up to Rs.75,000! Buying health insurance is not just an expense but it is also an investment in your health. Hospitalization costs have gone up  sharply and they can make a big dent on your financial plan if you are not adequately insured. You can be more economical in your approach and buy a family floater so that you get good coverage at a reasonable cost.

Make the best of tax exemptions in the new tax structure

In February 2019, the interim budget made all incomes up to Rs.5 lakhs fully tax exempt. However, this was in the form of a rebate. Also, this would be on the amount after all tax exemptions. That gives you huge leg room. If you add up the standard deduction of Rs.50,000, Section 80C limit of Rs.150,000, home loan interest of Rs.2,00,000 and the health insurance limit of Rs.75,000; you can end up paying zero tax even if your income level is as high as Rs.975,000. That is the key.

Make the best of tax exemptions and use them wisely. That can make a big difference to your tax plan!

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Tips to Make Wise Tax Saving Investments

29 Nov 2019

The Income Tax Act gives adequate options to save tax and the onus is on the tax payer to work out how to make wise tax saving investments. The traditional approach to tax saving was to rely on products like PPF, LIC and NSC. Today, there is a wider palate on offer and you make a choice of products that fit into your unique requirements. Here are 5 tips to make wise tax saving investments.

Tax investments must also fit into your financial plan

This is a common mistake. We treat tax saving and financial investments as two discrete activities. Actually they are related. For example, when you buy PPF or NSC for tax saving, that increases your exposure to debt. When you work out your debt / equity mix, these must also be factored. Similarly, ELSS is part of your equity exposure and must fit into your overall equity mix in the financial plan. Your financial plan should still be the primary document and any tax plans must fit into that.

ELSS funds have multiple benefits  as tax saving instruments

Tax saving mutual funds or ELSS funds can be value accretive to your finances in multiple ways. For example, the lock-in period on ELSS funds is the lowest at 3 years among all the Section 80C investments. In comparison, PPF has a 15 year lock in while ULIPs and Long term Bank FDs have a 5 year lock in. Secondly, even as you save tax, you are also creating wealth through equities. That is an advantage no other Section 80C investment offers. Of course, ULIP has an equity component but the loading is too high.

Adopt the SIP approach for tax saving mutual funds

It is general practice to make a last minute rush for tax saving instruments but that could put pressure on your finances. A better way would be regular tax saving. For example, if you have decided that you want to invest Rs.1 lakh in ELSS funds during the year, convert that into a SIP of Rs.8000 per month. This has two benefits. Firstly, it synchronizes your outflows with inflows so you don’t feel the financial pressure pinching you. Secondly, you get the benefit of rupee cost averaging. As you spread your SIP mutual funds, you get the best of market volatility in your favour.

Make the best of health insurance benefits for your family

The health insurance premium that you pay is exempt up to a contribution of Rs.25,000 for yourself and your family. If you are also insuring the health of your parents (being senior citizens), your actual tax exemption can go up to Rs.75,000! Buying health insurance is not just an expense but it is also an investment in your health. Hospitalization costs have gone up  sharply and they can make a big dent on your financial plan if you are not adequately insured. You can be more economical in your approach and buy a family floater so that you get good coverage at a reasonable cost.

Make the best of tax exemptions in the new tax structure

In February 2019, the interim budget made all incomes up to Rs.5 lakhs fully tax exempt. However, this was in the form of a rebate. Also, this would be on the amount after all tax exemptions. That gives you huge leg room. If you add up the standard deduction of Rs.50,000, Section 80C limit of Rs.150,000, home loan interest of Rs.2,00,000 and the health insurance limit of Rs.75,000; you can end up paying zero tax even if your income level is as high as Rs.975,000. That is the key.

Make the best of tax exemptions and use them wisely. That can make a big difference to your tax plan!