Have you started saving tax for the current financial year 2018-19?
Probably not. It is obvious that you may have spent last three months frantically trying to save parts of your meager post-tax income from the clutches of the tax-man. And now once it is finally over, you don’t feel like thinking about it at least for next couple of months.
You are not alone. However, unless you do something about it now, at the end of this financial year you will again be enjoying the same throes of frantic tax saving and large deductions.
When you shift most of the burden in the initial months, you will have better income in the later months to spend.
Just to motivate you more, and give you a clear head about what to do next, here are five reasons you need to start tax saving investments now:
1. Starting Early Keeps the Pressure Low
The total amount of tax you can save in the Financial Year 2018-19 is up to Rs. 315,000 (including all sections where you can simply invest and save). You may be one of those stalwarts who can spare this much from a single month’s salary. But, just in case, you are not, why not distribute it over the next 10 months and save about 30,000 each month. (‘How’ part explained later in this article)
2. Select Investments of Your Choice
The biggest fallacy of last-minute tax planning is that the choices you make hastily may not serve you in the long run. The effect is, many investors rue the lack of money or liquidity in tax saving investments in the later years. A trend which is pretty evident in life insurance policies.
People end up buying one too many committing a large amount of lump sum premium investment. However, this commitment made in haste breaks within 2 to 3 years; that is even before the policy can acquire a surrender value.
3. Better Returns (ELSS)
ELSS schemes offer the shortest lock-in period for your invested money. However, since it is a pure equity instrument, the best mode of investment is a monthly SIP. Obviously, you cannot start an SIP in January 2019 and expect to complete your tax saving investment by March 2019.
Even if you do, chances of averaging out the cost of Units are slim. Even better is when you start early (say in May 2018), invest smaller amount each month, and complete your tax saving target by March 2019 (or even Feb 2019).
4. Maximise Tax Savings
In the scenario where you expect to spend more money than you plan to, it is likely that you will miss your tax saving goal. Unless, of course, you start saving early, and spread out the burden over as many months as possible. Hope 10 months make it more convenient?
This is more like sitting in an important exam and attempting the heaviest questions first. When you shift most of the burden in the initial months, you will have better income in the later months to spend.
5. Make Investments Useful
Starting early also gives you time to allocate investments. For example, most tax saving investments need you to stay invested for at least three to five years. So, it may not be a good idea to use tax saving to meet a goal which may just be around the corner within five years.
Thus, you should know that the tax saving investments are for medium to long-term goals. Simultaneously, you should have additional short-term savings to meet shorter-term goals.
Where Can You Invest for Tax Saving?
Apart from the standard deduction, in lieu of Medical and Conveyance reimbursement, rest of the deductions are same. Remaining deductions under section 80C and 80D have seen very little change.
A. Life Insurance Plans
Investment and insurance plans from life insurance companies are eligible for tax saving under section 80C. The plans where investors can claim the premium paid for tax deduction are:
- Term Life Insurance
- Unit Linked Insurance Plans (ULIPs)
- Traditional Life Insurance Plans (Endowment and Money Back plans)
- Pension Plans
Minimum lock-in period (or investment period) in these instruments is five years.
B. Public Provident Fund (PPF)
A very popular retirement savings schemes for workers and business owners in the unorganised sector. This scheme enjoys sovereign guarantee on returns and thus, is the safest investment. However, returns are revised each year as per market conditions.
C. Sukanya Sammriddi Yojana (SSY)
A scheme quite similar to PPF, but only available to the guardian or parents of a girl child. All conditions are same except that the maturity is decided based on the girl child’s age. To know more about this scheme read SSY – Empowering Daughters.
D. Equity Linked Savings Scheme (ELSS)
While apart from ULIPs, all other tax saving schemes provide safe returns, ELSS offers a chance to save tax for aggressive investors. ELSS are pure equity funds with a minimum lock-in period of three years. However, given the high-risk nature of the investment, you should give it at least five years time to grow.
E. National Pension Scheme (NPS)
National Pension Scheme or New Pension Scheme, has given a new definition to retirement investment. Using the Tier I account to park your retirement savings, you can save up to Rs. 200,000 every year. You can claim the additional voluntary contribution as non-taxable saving up to Rs. 50,000.
Plus, there is no maximum limit to the money you can save in NPS.
F. Health Insurance
Like the life insurance, health insurance premium is tax exempt under section 80D. You can claim any premiums paid for the following health insurance plans for deduction:
- Mediclaim Insurance (comprehensive or family floater health insurance)
- Critical Illness cover
- Heart and Cancer Insurance
Plus, you can claim the deduction on health insurance premium paid for your family, which includes you, your spouse and kids, and for your parents (See table below).
|Self, Spouse & Dependent Children||Parents (whether dependent or not)|
Total deduction under Section 80D
|All family members are below the age of 60|
|Except the parents, everyone is below the age of 60|
|All family members are above 60 years of age|