Looking for last-minute tax planning with Section 80C investments? Here’s help

Looking for last-minute tax planning with Section 80C investments? Here’s help 

With less than ten days left for the financial year 2016-17 to end, the rush to save tax is nearing its natural epitome. Not so much for salaried individuals as they are expected to have done their bit by now (thanks to the regular reminders by account office), it’s the non-salaried individuals who could still be scurrying around to find the right tax saver. 
For anyone looking for a tax-saver at this fag end of the tax saving season, the probability of committing errors are more. The chances of locking funds in an unsuitable tax saving investment are quite high. Tax-saving investment should never be made on an ad-hoc basis or for an ill-conceived goal. 
Still, if you are one of those waiting for the last-minute tax planning, here are few important things to look at. 
While choosing the right tax-saver, base your decision on these five important things, among others: 
* Total amount of deductions – See how much maximum you can avail 
* Existing commitments – See if any fresh investment is required or not 
* Types of tax-saving instrument – See what suits you 
* Tenure of the investment – See if the tax saver can help you meet your goal 
* Taxability of income from the investment – See the post-tax return based on your income slab 

Once you have got a fix on these, equally important is to choose a tax-saving instrument which can be linked to a specific goal. 

Total amount of deductions 

Section 80C allows deduction from gross total income (before arriving at taxable income) of up to Rs 1.5 lakh per annum on one or more eligible investments and specified expenses. The eligible investments include life insurance, Equity Linked Savings Schemes (ELSS) mutual funds, Public Provident Fund (PPF),  National Savings Certificate (NSC), etc., while expenses and outflows can include tuition fees, principal repayment of home loan, among others. 

If you have exhausted your annual limit Sec 80C limit of Rs 1.5 lakh, you can also look at National Pension System (NPS) to save towards retirement and, in the process, save additional tax. 

From 2015-16 onwards, an additional (additional to Section 80C) deduction of up to Rs 50,000 under Section 80CCD (1b) for investment in NPS is also possible. For someone in the highest 30 per cent income tax bracket, it’s an additional annual saving of about Rs 15,000. 

Further, the premium paid towards a health insurance plan for self and family members qualifies for tax benefit under Section 80D for Rs 25,000 and Rs 30,000 for those above 60. If one has a home loan, interest payments made towards its repayment can also be claimed under Section 24 of the Income Tax Act. The other deductions include donations under Section 80G, interest payments under Section 80E for education loan, etc. 

Complete tax saving guide for FY 16-17 

Existing commitments 

Before you start looking for the right tax saver, run this simple exercise to evaluate whether you actually need to make any fresh investments for this financial year (2016-17). 

Non-Section 80C deductions:

 First, look at all non-Section 80C deductions like the interest paid on home loan, health plans, educational loan. 

Section 80C outflows: 

Then consider Section 80C-related expenses like children’s tuition fees, principal repayment on home loan, pure term life insurance plans premiums. 

Existing Section 80C commitments: 

Consider all the existing Section 80C commitments to invest/to pay premium such as in Employees’ Provident Fund (EPF) and endowment life insurance, respectively 
The exercise above gives you a total of existing commitments under Section 80C, 80D and other deductions. Now, from your gross total income, reduce the amount to arrive at the taxable income. 
If your net income after doing the above calculation is still above the tax exemption limit of Rs 2.5 lakh then you need to look at further tax saving. To reduce taxable income further and provided the limit of section 80C isn’t yet exhausted, look for the right Section 80C investments. 

Types of tax-saving instrument 

Within the basket of Section 80C investments, there are two options to choose from: Investments offering “Fixed and assured returns” and those offering “market-linked returns”. 
The former primarily includes debt assets, including notified bank deposits with a minimum period of five years, endowment life insurance plans, PPF, NSC, Senior Citizens Savings Scheme (SCSC), etc. The returns are fixed for the entire duration and generally in line with the rates prevalent in the economy and very close to inflation figure. They suit conservative investors whose aim is to preserve capital rather than create wealth. 
The ‘market-linked returns’ category is primarily the equity-asset class. Here, one can choose from ELSS of mutual funds and Unit-Linked Insurance Plan (ULIP), pension plans and the NPS. The returns are not assured but linked to the performance of the underlying assets such as equity or debt. They have the potential to generate higher inflationadjusted return in the long run to the extent they are based on the equity asset class. 

Tenure 

All the above tax-saving instruments, by nature, are medium to long term products: From a three-year lock-in that comes with ELSS (Equity-Linked Saving Scheme) to a 15-year lock-in of PPF. Some like life insurance require annual payments to be made for a longer duration 

Taxability of income 
Another important factor to consider is the post-tax return of the tax-saving investment. For instance, most fixed and assured returns products such as NSC provide you with Section 80C benefits, but the returns, currently 8 per cent (five-year) annually, are taxable. This makes the effective post-tax return equal to 5.52 per cent for the highest taxpayers. Considering the annual inflation of six per cent, the real return is almost zero! 
Of all the tax-saving tools, only PPF, EPF, ELSS and insurance plans enjoy the EEE status, i.e., the growth is tax-exempt during the three stages of investing, growth and withdrawal. 

Making the right choice 

Firstly, identify your medium and long term goals arising at different stages of your life. A market-linked equity-backed tax-saving instrument is good for long term goals as equities need time to perform. And, before considering a taxable investment, see the tax rate that applies to you and consider the post-tax return. A low post-tax return after adjusting for inflation will not help you in achieving your goals in the long run. Inflation erodes erodes the purchasing power of money, especially over long term. 

Conclusion 

Tax planning should ideally begin at the start of every financial year. Remember, the risks of planning tax-saving in a hurry later are manifold. There is, for instance, a high probability of picking up an unsuitable product. Also, there isn’t any one instrument that can help you save tax and at the same time also provide safe, assured and highest return. Your final choice should ideally be based on a gamut of factors rather than solely being driven by returns   from the financial product.