Tax Savings: Do’s and Don’ts
Investing in tax-saving instruments is essential to keep your tax liability on the lower side. However, such tax-saving exercises at the end of a financial year come with significant risks of wrong investment decisions.
Are you planning to save on your income tax through tax-saving investments? Go through the following sections to find top strategies that can help you do it efficiently.
Top Strategies for Tax Saving
To make the most of your tax-saving investments, you need to follow certain tips and avoid some very basic mistakes. Here is a list of some of the dos and don’ts that you should try to follow while investing in tax-saving instruments to save income tax:
What You Should Do
These are a few of the tips that you can follow if you wish to invest in tax-saving instruments:
- Invest in ELSS funds
If you are looking to reduce your income tax liability, you can consider investing in an Equity Linked Saving Scheme. ELSS is the only tax-saving mutual fund where you can claim a tax deduction for your investment.
As per provisions under Section 80C, you can avail of tax benefits of up to Rs. 1.5 lakh for investment in ELSS. Do remember that this tax deduction limit is for combined contribution in different investment options such as PPF, life insurance policies, NSC, and others.
- Make an additional contribution to retirement funds
In case you are a salaried individual, you can consider making a contribution towards VPF (Voluntary Provident Fund) along with EPF if you have not reached the investment limit of Rs. 1.5 lakh. The additional contribution that you make will be deducted from your taxable income. Moreover, your employer’s contribution to NPS will be eligible for a tax deduction.
- Avail tax benefits on home loan repayment
Do you pay a monthly installment for a housing loan? You can seek tax deduction on the amount that you pay as interest and principal under provisions of specific sections. Section 80C allows a maximum tax deduction of Rs. 1.5 lakh for principal repayment, and Section 24 enables you to claim a maximum deduction of Rs. 2 lakh on interest payment.
- Claim tax benefit for health insurance premiums
You can claim tax deductions to lower your taxable income for making premium payments on your health insurance policy. Section 80D of the IT Act allows a total tax deduction of Rs. 25,000 for premiums paid for medical insurance of self and family members. There is also an additional tax benefit of Rs. 25,000 if your parents are less than 60 years and Rs. 50,000 if your parents are over 60 years.
However, if you and your parents are over 60, then you are eligible for a tax deduction of up to Rs. 1 lakh.
- Opt for the new concessional tax regime
Apart from making tax-saving investments and expenditures, you can also reduce your income tax liability by opting for the new tax regime. Individuals or HUFs can pay taxes at lower rates. That said, they cannot claim certain deductions or exemptions.
Make sure to compare the tax that you would have to pay under both old and new regimes, and then choose one that is more beneficial.
What You Should Not Do
Here are a few common mistakes that you should avoid if you are looking to save taxes through tax-saving instruments:
- Choosing an ELSS fund based on its recent performance
Investing in an ELSS fund is an excellent way to save income tax through mutual fund investments. However, many often choose an ELSS fund based on its current or recent performance. There might be a possibility that most top-performing schemes do not perform well in the upcoming years. So, make sure to invest in an ELSS fund based on its long-term performance.
Furthermore, before allocating your savings, consider other aspects like expense ratio and the fund manager’s experience.
- Making wrong investments
You should be careful in choosing the type of investments for tax-saving purposed. This is because you might end up putting your money in the wrong investment options in a hurry. Investing in a fund that doesn’t match your goals or objectives would prove to be pointless for you.
- Ignoring proper asset allocation
Make sure to avoid investing in only one asset class to maximize returns and reduce risk. Even if you aim to save on your income tax through investing, you should look to diversify your portfolio. This will help you to reach your desired investment objectives while keeping risks in control.
- Invest in ELSS funds via SIP
Many individuals prefer to invest through SIP in an ELSS fund. However, if you are looking to reduce your income tax liability through ELSS, then keep in mind that each SIP comes with a lock-in period of 3 years.
- Not assessing the requirement
There are numerous tax-saving instruments if you opt for the old tax regime. However, before you choose any tax saver option, do remember to determine how much of your investment in it will be eligible for tax saving in the current fiscal year.
Wrap-Up
Although the tax-saving instruments help in reducing income tax liability, you should have a sound financial plan in place to manage your finances efficiently. You need to choose investment options that are in sync with your financial goals.
Moreover, it is always beneficial to plan for tax savings at the beginning of a financial year. This way, you get more time to make necessary decisions and thereby reduce the risks of committing mistakes.
