Planning for your taxes can be a daunting and cumbersome task. And some of you are scurrying to complete your last minute tax planning done. We help you to finalise your tax-saving investments in five steps.
Buy an adequate life insurance cover if you have financial dependents. The insurance premium qualifies for a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. Always buy a term insurance plan.
Buy a health insurance cover for you and family. The premium qualifies for a tax deduction of up to ₹25,000 (₹30,000 if you are above 60) under Section 80D of the Income Tax Act.
Find out how much is your Employee's Provident Fund (EPF) or National Pension Scheme (NPS) contribution. Your EPF and NPS contributions qualify for a tax deduction under Section 80C and Section 80CCD(1) respectively.
Find out how much more tax can you save under Section 80C. As you know, the maximum deduction available under Section 80C is ₹1.5 lakh. Find out how much you are already investing by adding your life insurance premium and EPF/NPS contribution. Then deduct the amount from ₹1.5 lakh. Eureka. Now you know much extra you need to invest to exhaust your tax deduction limit under Section 80C. By the way, you can clam an extra tax deduction of ₹50,000 on your contribution to NPS under Section 80CCD(1B). In other words, you can save taxes of up to ₹2 lakh if you contribute to NPS. Remember, you can only claim a maximum tax deduction of ₹2 lakh under Section 80C and Section 80CCD. So do not invest more than the required amount.
Choosing the best tax-saving option is no sweat. Here is the easy way out. Do you like taking risk? If yes, pick Equity Linked Savings Schemes (ELSSs) or tax planning mutual fund schemes. These schemes have a lock-in period of three years and they offer tax-free returns. If you are totally risk averse, you can opt for 5-year tax saving bank fixed deposit. Remember, the interest is not tax free. Risk-averse taxpayers can also start investing regularly in Public Provident Fund (PPF) to invest for long-term financial goals like retirement, child's education, etc. PPF has a lock-in period of 15 years and interest and principal is tax free on maturity.
The story was first published in April 2016.