January is the time of the year when many of us wake up to the fact that we need to invest our monies in tax-saving instruments.
The good news is that for the current financial year, that is, 2014-15, we can invest up to Rs 1.5 lakh under Section 80C. The limits were enhanced from the earlier limit of Rs 1 lakh in the budget announced by finance minister Arun Jaitley in July 2014. Here we take a look at the most popular avenue for saving taxes.
The Public Provident Fund (PPF) is one of the most popular instruments for tax saving as it offers assured returns that are tax-free. The interest rate is decided each year. Current year, the rate of interest is 8.70%. The normal maturity period is 15 years and can be extended by another five years. The minimum amount of contribution is Rs 500 and maximum is Rs 1.5 lakh.
If you are younger and have an appetite for risk, then it is advisable to opt for Equity Linked Savings Scheme (ELSS). These are schemes floated by mutual funds that offer tax deductions. Most tax saving schemes have a lock-in period, of which ELSS have the shortest lock-in period of three years.
"First calculate how much you are already investing through your contribution to the Employee Provident Fund (EPF), the insurance premium and the repayment of capital in case of housing loan. Then invest the balance (of the limit of Rs 1.5 lakh) into tax saving instruments,'' says Arnav Pandya, certified financial planner and financial advisor.
Investments in EPF, repayment of housing loan and insurance to qualify for tax deductions. In the case of provident fund, the additional contribution towards Voluntary Provident Fund (VPF) is also eligible for tax deductions.
Incidentally, while the repayment of home loan principal qualifies for deduction under Section 80C, the interest component also saves you income tax under Section 24 of the Income Tax Act. It is advisable to take advantage of the full limit of Rs 1.5 lakh to save as much tax as possible.
The payments towards tuition fees for maximum two children's education is also eligible for tax deduction not exceeding Rs 1.5 lakh (including investments in insurance, etc)
While the tax saving plans benefits are an additional advantage, but it should be aligned to your financial goals. "Make it part of your overall investment plan,'' says Hemant Rustogi, CEO, Wise invest Advisors.
There are many more avenues for tax savings such as Ulips, National Savings Certificates (NSC), bonds and fixed deposits. "It is advisable that one considers the rate of interest and whether the returns are taxable or tax-free while choosing an instrument,'' say experts.
In addition to the above, there are other tax breaks that should be considered including those available for certain disabilities and or medical expenses incurred in case of specified ailments.
Taxes are inevitable. It is advisable to plan ahead, preferably at the beginning of the year. But for those who are yet to plan their taxes, it's a good time to start now. Better late than never.