1) Calculate your tax liability
The first step to do in your tax planning process is to make sure that you know what your tax liability is. You can use Our’s simple tax calculator for this purpose. Then, re-calculate the tax liability by considering deductions which you will get by investing in various tax saving products. This will give you an idea of how much tax you will be saving by investing in tax saving products. If you do not see too much value in this, you can even skip purchasing such products.
2) Buy only term insurance
Of course, this is a common tip that you might have heard from various sources. You might have already planned to purchase an insurance policy to save some tax. It’s good that you are saving tax as well getting insured. It’s like two birds in one shot. However, it’s better to keep it as 2 birds rather than trying for 3. The 3rd one here refers to investment. When you have already planned for an insurance policy, why not purchase a pure insurance policy such as term insurance? Only thing missing would be (some) returns, which you can definitely compensate with better yielding products. People generally buy different types of Endowment Policies or ULIP plans for tax planning, which is not good.Moreover, there is no best time to buy insurance.
3) EPF Contribution to Section 80C
EPF has been a popular saving instrument probably because it’s a mandatory deduction for many organizations. Before choosing any other product for deduction under section 80C, consider the contribution to EPF first. Most of the times, our contribution exceeds the Rs. 1 lakh limit given by the IT department under this section. If that is the case, there is no point in even looking out for other deductions such as life insurance, PPF, NSC, etc.
4) Check for ELSS Performance
Equity linked savings scheme (ELSS) is another popular tax saving investment under section 80C. This is an excellent combination of mutual fund and tax saving. It invests in equity related products. If you are planning to pick one such ELSS scheme, you can surely go ahead. However, do not be under the impression that all schemes are the same. There has been great difference in returns of top and worst performing funds. Know the best performing ELSS funds and then take a call on investing in those. One more point to remember in this investment is that your money is locked for 3 years. If you are doing an SIP, each SIP will be locked for 3 years from the date it starts.But it may be better option over EPF or PPF if one can opted for the SIP in ELSS funds.
5) Invest in PPF before 5th of the month
PPF is the only financial product which has EEE (Exempt Exempt Exempt) tax status. It means the investment gives you tax benefit, interest is tax free and the maturity amount is tax free as well. If you are planning to invest in PPF for tax saving this year, do it before 5th of the month. PPF interest for the month is calculated only if you contribute to it before 5th of a month. If you invest beyond it, you stand to lose out on the interest for the month. If you are planning to invest in PPF systematically every year, you can do it before the said date.
6) Check RGESS returns
RGESS is the latest tax saving scheme on board. It helps you save tax by investing in specified stocks or mutual funds. Investment up to Rs. 50,000 is allowed in this scheme with 50% deduction on the investment. Like ELSS, RGESS product also has to be analyzed before investment. Not all of them produce the same returns. Assume you invest Rs. 50,000 in this product. The savings would be Rs. 2500 if you are in 10% tax slab, Rs. 5000 if you are in 20% tax slab and Rs. 7500 if in 30% tax slab. You will not be eligible for RGESS if you are not a first time equity investor. Also, if you invest in it, you cannot withdraw any units before 1 year of investing in it.