How to approach tax saving when you have few months left in a financial year2 min read . Updated: 28 Dec 2020, 06:49 PM IST
- If employees fail to make investments now, the employer will deduct higher tax over the next three months
- Besides provident funds, an individual must consider ELSS that can help in creating long term wealth
Many salaried start their tax-related investment in December when they receive investment declarations from their employers. At this point, they have little option but to make investments as many employers also ask to submit proof.
If employees fail to make investments now, the employer will deduct higher tax over the next three months. Until December, most employers pay salary based on the declaration employees give at the start of the financial year.
If you don’t provide investment proof, you can always do it later and claim a refund. However, the sooner you start, the better it is for your finances. If you delay, your burden will increase later as a major portion of your salary would go into tax-related investments.
The first step is to look at the shortfall under different sections. For example, the employee provident fund (EPF) that the employer deducts qualifies for deduction under Section 80C. So does the principal of your home loan.
Based on such investments and payments, you can calculate the shortfall.
For example, if an individual’s EPF and home loan principal adds up to, say, ₹90,000, he will need to make just additional investments of ₹60,000 to get the tax benefit under Section 80C.
Make a budget for the tax-related investment over the next three months after deducting your expenses from the salary. Based on the budget, select the best tax-saving product. Say, you can spare ₹20,000 each month. Now, decide how you want to use it and where you want to invest. For example, you can choose to invest ₹15,000 in equity-linked savings scheme (ELSS) and ₹5,000 in the public provident fund (PPF).
The best tax savings instruments follow the exempt- exempt- exempt (EEE) taxation. It means an individual gets a tax deduction on investment, on accrual, and when he redeems. EPF and PPF have EEE taxation.
Besides provident funds, an individual must consider ELSS that can help in creating long term wealth and NPS can help you get a higher deduction under Section 80CCD.
Avoid any insurance product that comes with investment options such as a unit-linked investment plan (Ulip) or guaranteed income plan. It’s best to opt for a term life insurance cover where you won’t get back anything at the end of the policy term. That’s because it’s the cheapest.
According to financial planners, you can easily manage your different goals with 5-6 products. For example, instead of investing in the Sukanya Samridhi Scheme, you can look at ELSS for the same purpose.
Keep your investments simple and across a few instruments that can help you track them easily.