Avoid last-minute tax saving traps

Financial year 2013-14 is just about to close. Those who have not planned their investments may be scrambling to make last minute, tax-saving decisions. But don’t let haste force you into investments which are not appropriate for your risk profile or goals. Here are a few tips that might come in handy at the last moment.

Insurance policies: Many agents suggest insurance policies to mitigate immediate tax outflow. Though insurance works if you need protection per se, bear in mind that insurance entails recurring expense. If you choose to terminate the policy prematurely, or fail to pay any premium within two years from the date of buying the policy, then no tax deduction would be allowed. The deduction earlier claimed will in fact be deemed as income of that tax year and liable for taxation.

Unit-Linked Insurance Plans: People invest in ULIPs on the assurance that it would yield good results. However, there is a minimum lock-in period of five years in such schemes, according to the provisions of Section 80C (5). Premature withdrawals would render the deduction claimed in earlier tax years as ineffective and the deductions claimed would be considered an income of such tax years, liable to be taxed.

Health checks: Given the fact that medical costs for hospitalisation have shot through the roof, it is advisable to go for preventive health check-ups for self and family. But the catch is that irrespective of the amount spent on preventive health check-ups, the amount of deduction available would be restricted to ₹5,000 and this deduction would be within the maximum ceiling of ₹35,000 for health insurance under Section 80D.

Public Provident Fund (PPF): This is a popular investment option to deposit one’s money, as contributions to PPF are eligible for a deduction under Section 80C of the Act. Further, the interest earned on such deposits is exempt. Since the minimum amount to be contributed is ₹500, there is no major obligation on the part of the investor to contribute a big amount in subsequent years. But PPF contributions have a lock-in period of 15 years, even though a loan may be availed of by the investor against the deposit. Plus, the maximum amount that one may contribute to a PPF account is ₹1 lakh.

The writers are employed with Deloitte Haskins & Sells.