Taking advantage of tax deductions for investment under section 80C of the Income Tax Act must start with a list of investments already made to avoid unnecessary overinvesting for tax deduction.
The benefits from tax deductions are provided on a specified range of investments made during a financial year. Time is running out for making investments for the financial year 2016-17, with barely three weeks left. Considering the very limited time available to the taxpayer a warning is warranted – most investments made for tax deductions during the last month of the financial are rash and result in substantial and real losses to the investor. The taxpayer would be better off not making such investments, and instead just paying taxes.
Taking advantage of tax deductions for investment under section 80C of the Income Tax Act must start with a list of investments already made to avoid unnecessary overinvesting for tax deduction. The list of qualifying investments is long and includes tuition fees paid for two children, repayment of the principal portion of a home loan, along with a range of investments some of which are life insurance premium, equity linked savings schemes of mutual funds (ELSS), Provident Fund - both Public Provident Fund (PPF) and Employees Provident Fund (EPF) and National Pension Scheme. If you are employed it is likely that you are already taking advantage of the deduction under EPF, which is a deduction from your monthly salary.
An important consideration for your tax deduction investments is that your investment is smart, and is one that you would make even if there was no tax benefit on it. Follow this rule faithfully and you will not have any reason to fret about the benefits you make on your investment. Let the investments be those that will specifically meet your future goals.
Safety, followed by returns is the rule to follow. The first choice here would be the Public Provident Fund. The principal and interest is guaranteed by the central government. It also meets the long term goals of accumulating wealth for buying assets such as a home, or for retirement. Term life insurance is the cheapest way to buy pure life insurance, with the additional attraction being tax deduction. The deduction available on the principal of the home loan, with an additional Rs. 2 lakh deduction (under section 24) a year on the interest paid on the loan is an incentive to buy a home – if you do not have a home you could plan this for early next year, as this late in the year the interest component of the loan repaid may not be sufficient. One does not want to take major decisions in a hurry, only to lose money in the deal. The maximum deduction that can be availed on section 80C is Rs. 1.5 lakh.
National Pension Scheme (NPS) has an additional Rs. 50,000 deduction available, along with an excellent tool to save for retirement. Ensure that you have PPF and NPS among your investments, and cherry pick among the others.
The writer is CEO and Founder, Right Horizons