Jog your memory and check if you have ever come across an individual who hasn’t sighed after looking at his/ her income tax liabilities. On the contrary, you’re most likely to remember people trying to make a series of investments before March or a colleague running frantically to find an insurance policy for the last Rs 30,000 he needed to avail of the entire Rs 1 lakh tax exemption available under Section 80 C of the Income-tax Act.
No doubt, tax planning is an extremely important activity but a lot of people seem to adopt a careless approach towards it. The attempt is, more often than not, to find a quick measure to deal with the moment’s needs. Most see this as a necessity that must be fulfilled but has no relation with their investment goals or financial plans.
Financial planners, however, say that tax planning should be considered a critical part of financial planning. Instead of jumping at the first instrument that appears on the horizon with the promise of a tax deduction, individuals should take calculated decisions and choose instruments that give them the dual benefits of tax reduction as well as good returns in the long term.
Fortunately for the Indian investor, there seems to be a number of instruments which cater to this two-fold need. Before you do so, however, take a look at your existing portfolio to see what deductions you are already eligible for and how much you need to make up. SundayET helps you out by telling you about some of the tax-saving investment avenues.
Tax-saving funds (or ELSS)
If you’re looking at dabbling in equity but don’t want to take the plunge on your own, you could look at investing in a tax-saving fund. This promises you a tax deduction of up to Rs 1 lakh under Section 80 C. However, these funds generally have a lock-in period of three years and it is generally advised that you only put in money that you will not require for the next three years at least. However, dividends and bonuses are not covered under this lock-in clause.
Fixed Deposits
If you’re a risk-averse person who doesn’t want to take the money out of the bank, you could contemplate putting your money into a fixed deposit. At present, only the five-year fixed deposit (of up to Rs 1 lakh) has the tax-saving elements associated with it. The current rates of interest seem to be about 8.25% for the general investor and 8.75% for senior citizens, which did not always match up to the rate of returns which are offered by other types of fixed deposits available in the market, but the benefit is that the maturity amount is currently tax-free.
However, in the event that one was to choose between investing in an FD or an ELSS, financial planner Veer Sardesai says, “One should also look at tax-planning with the aim of maximising wealth and the predominant aim should be to find a way to make the money grow faster. If you are looking in terms of returns, then ELSS are in a position to give a better return than FDs.” However, if a person is keen on putting money into FDs, then Sardesai adds only one’s contingency fund should be invested via this avenue in the current situation.
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