Not done your tax savings investments yet? Act quickly

The end of the financial year is fast approaching. If you haven’t worked on your tax savings yet, it’s time to get going. Certain investments, insurance premiums and eligible donations can help you lower your tax burden. With just about 10 days to go for the deadline (March 31, 2020), here’s a lowdown on options available to you.

To begin with, compute your taxes based on your income and investments. Check if you have exhausted the limit of ₹1.5 lakh a year, which can be claimed as deduction under Section 80 C. For this, you have to add up your monthly contributions to the Employees’ Provident Fund (EPF), repayment of principal amount on your home loan and any tuition fees spent by you on the school/college education of your children (restricted to two).

Besides the above, there are many options available for tax-saving, ranging from five-year term deposits with banks to annuity (insurance) products. Choose judiciously based on your long- and short-term financial goals, risk appetite and lock-in period of the investments.

Deposits and small savings

If you haven’t exhausted the limit under Section 80C and are looking for simple, conservative avenues, a tax-saving time deposit with any scheduled bank or the post office, for a tenure of five years can be a good option.

While most banks currently offer interest in the range of 6.25 to 7.25 per cent on their tax-saving deposits, the post office term deposit can fetch 7.7 per cent. Note that while the investments qualify for deduction, the interest earned will be taxable.

If you wish to save the taxes on the interest earned too, the National Savings Certificate (NSC), which currently offers 7.9 per cent interest, compounded annually, would be a good choice. The interest also qualifies for deduction under Section 80C, if shown as re-invested.

Senior citizens get a dual advantage of higher interest rates offered on deposits with banks, and also a tax break of ₹50,000 a year on the interest on their deposits with banks or the post office. To maximize their returns on tax saving investments, senior citizens can consider investing in the Senior Citizens Savings Scheme (SCSS) with the post office (also eligible under Section 80C). The SCSS, with a five-year maturity, currently offers 8.6 per cent per annum, payable in quarterly instalments.

Retirement planning

Aside from tax savings, certain investments can help you build your retirement corpus as well. But keep in mind the long lock-in period in such investments. Contributions to EPF, including voluntary contributions, can be claimed as deduction under Section 80C.

Besides, you can also consider investing in the National Pension System (NPS). Investments in NPS Tier 1 can fetch you an additional deduction of ₹50,000 under Section 80CCD, over and above the Section 80C benefit. Based on your risk appetite, you can choose the allocation, under NPS, between debt and equity.

If you desire a somewhat shorter time horizon, the 15-year Public Provident Fund (PPF) could fit the bill. The rate of return on the EPF is declared at the end of every fiscal year (8.5 per cent for FY2020) while that on the PPF is subject to change every quarter (7.9 per cent currently). Returns on the NPS are market-linked.

In the EPF (including VPF) and PPF, the interest earned and the corpus amounts are exempt from tax. In the NPS, income earned is exempt and 60 per cent of the corpus can be withdrawn tax-free; the remaining has to be used to buy an annuity.

ELSS for risk takers

If you have appetite and willingness to take some risk, equity-linked saving schemes (ELSS) with a good track record can be a suitable tax-saving choice. While this investment can give healthy returns in the long run, keeping in mind the volatility of the asset class, be prepared for some bumps in the short term.

Insurance

If you haven’t taken adequate insurance cover yet, prioritise it now. The premiums paid on life insurance policies (if the sum assured is at least 10 times the annual premium) form part of deductions under Section 80C.

Use the window to get an adequate life cover (say, up to 10 times your annual salary). Go for the cost-effective online pure term plans over traditional plans or ULIPs.

Also, adequate medical cover, for you and your family, will both protect you against medical emergencies and also help you save taxes. You can claim a deduction under Section 80D of up to ₹25,000 (₹50,000 if you are a senior citizen) on the health insurance premium paid for you, your spouse and dependent children.

Donations

You can also claim a deduction under Section 80G of up to 10 per cent of your gross total income, by donating to institutions and funds approved by the government. Note that, for certain donations the deduction is limited to only 50 per cent of the amount donated.

Word of caution

A last-minute rush to invest in tax-saving instruments is generally not advisable; it could lead to sub-optimal decisions. So, come April, start planning early for next year. Tax saving should not be your sole objective while planning your investments. It should only be an added incentive for your investment choices.

Weigh in the risk-return metrics of your choices, and be mindful of the lock-in period as well. Keep in mind the recent changes in tax laws that allow you an option under a new tax regime to pay tax at a lower rate but without most deductions and exemptions, from the next assessment year. You may have to do a bit of number crunching, to choose whether to stick to the current tax regime or to shift to the new one.

Useful deductions

Section 80C – up to ₹1.5 lakh a year

Section 80CCD – up to ₹50,000 for NPS – Tier 1

Section 80D – Health insurance premiums

Section 80G - Donations