Every year, the month of March sees the highest number of investments in tax planning instruments. The last minute rush often leads to taxpayers making investments even in those instruments that yield only 5-6% returns like the traditional life insurance policy. At most, all young people will rush to park their money in the Public Provident Fund (PPF) even though the Government of India has brought down the interest rate to 7.6% from January 2018. But is this last minute rush necessary? A simple calculation and distribution of investments in tax saving instruments in the beginning on the financial year would not only reduce the burden on the salaried individual but also save you from the last minute hassles.
The sum of all these incomes is the gross total income of the individual.
Deductions and exemptions: For both male and female salaried individuals, the Indian government has set the limit of exemption at Rs 2.5 lakhs per annum for the year 2017-18. Above that, another Rs 1.5 lakhs is exempted through investments in instruments listed under Section 80C of the Income Tax Act. These include premium on life insurance policies, Public Provident Fund, Employees’ Provident Fund (RPF), Sukanya Samriddhi Account, National Savings Certificate, 5 year term deposits in post offices, 5-year notified tax saving fixed deposits in banks, Senior Citizens’ Savings Scheme. Expenses such as tuition fees and principal repayment on home loans also fall under this segment.
A maximum limit of Rs 25,000 invested in health insurance premium is exempted under Section 80D.
Taxable income: After subtracting the total amount under deductions and exemptions from the gross total income, one can derive the net taxable income.
Plan in the beginning of the year: When you know how much you shall be taxed and how much you can save from your investments, it is best to determine the goals and plan your taxes ahead. In this way you can divide your investments in a number of schemes. Also, the burden of investments does not come as a blow but is distributed throughout the year.
Look for tax incentives on the schemes before investing. Some schemes like the PPF and EPF enjoy a tax exempt exempt exempt (EEE) status, meaning the money is exempted from taxes at the time of investment, growth and withdrawal. On the other hand, some investments are given the exempt exempt taxed (EET) status, meaning the amount is taxable at the time of maturity.
Taking a decision in the last minute is always fraught with danger and in the case of tax saving, it is likely to lead to choosing unsuitable products. Hence, it is always advisable to study your incomes and do your tax planning in the beginning of the year. The aim of tax planning should not just be to save taxes but also to ensure that your investments grow.