It is January and there would be a huge pressure of tax saving. Your employer must be asking the investment proofs. Your colleagues would be scouting for the ways to save the tax. Do you also feel the tax saving heat? Do you also rush to invest? Relax and read following important points before taking any decision.
Assess The Need for Tax Saving
Everyone is struggling to invest for tax saving does not mean that you also need to invest a heavy amount. It is always better to find out the required investment. As you know that the section 80C limit is only 1.5 lakh. This limit gets filled very quickly.
Do you know your EPF contribution is also part of this section? If your basic salary is ₹1 lakh per month, your monthly contribution of ₹12,000 would be almost enough to fill the 80C limit.
This also applies to the NPS, however, in this case, you can go up to ₹2 lakh limit.
Today, we have to pay high fees for child education. This can also make a big part of the 1.5 lakh limit. If you have two children and paying ₹10,000/month as tuition fees, It would also make a big part of the 1.5 lakh limit.
In fact, if you have a school going children, you hardly require tax saving investments. The mandatory EPF/NPS contribution and tuition fees would be enough to fill the 80C limit.
Thus, before a rush to save tax you must consider the EPF/NPS contribution and tuition fees.
Don’t Produce Fake receipts
The HRA is a good way to save the tax. This is available to those people who live in a rented house and get this allowance from their employer. It can save big tax for you. However, the rules have become very strict now.
Earlier, most of the people used to produce the fake rent receipt. But now, rules have changed. You have to produce PAN of landlord and lease agreement if the rent amount exceeds ₹1 lakh/year.
To plug this hole, the income tax department is focusing on the malpractice of fake receipts. You may be caught during the scrutiny of the receipts. Thus, it is better to ask receipts from your landlord. Rather, you should talk about it while taking a home for rent.
Don’t Rush To Buy Home
The home loan gives you tax benefit in two ways. The principal amount of the home loan is eligible for tax deduction under section 80C while interest amount gets deduction under section 24. Under section 24, you can use the interest of up to ₹2 lakhs for the tax deduction.
But this lucrative tax benefit does not mean that you should immediately buy a home. The home purchase is a big decision. You should carefully evaluate the prospective home. Note, if you start living in your home, you would not get the benefit of HRA.
Also, often living on rent is much more economical than paying the EMI. The EMI should never exceed beyond 40% of your take-home salary.
Don’t Buy an Insurance Plan
The insurance companies do maximum business in January and February. It happens because most of the people buy an insurance plan just to save the tax.
Whereas, buying an insurance policy for tax saving is the wrong attitude. The insurance is bought to protect the financial well being of your family. This should be your primary reason while taking an insurance policy. Rather, if you want to take an informed decision, you should never buy an insurance policy in a rush.
You should particularly avoid the January- March period. This is the time when most of the insurance misselling happens. Often, you don’t need an endowment plan or ULIP. But in rush of tax saving, you give in under the pressure of an insurance agent.
In my view, you should never ever buy an insurance plan for tax saving. The maximum you can take a term insurance plan. By the way, there are many other ways to save tax.
Don’t Buy lump sum ELSS if market is rising
Equity Linked Saving Schemes are the good saving option if you want a higher return. But it carries the risk because of the investment into shares. You know that Share price goes through the ups and down. The timing is very important for share investment or ELSS. That is why we recommend investing through the SIP method. This method averages the purchase price as you invest a small amount every month.
But in the rush to save tax, people often invest a big amount at once. This can be loss making if you invest when the share market is at peak. Therefore, you should never invest a lump sum amount in ELSS during the market rally. For a lump sum amount, PPF is a better option.
Avoid Tax Saving FD and NSC
But these are the inferior tax saving product than EPF, PPF, ELSS and Sukanya Samriddhi account. The interest earning from the Fixed deposit and NSC is taxable. You have to add interest in your taxable income every year. Thus, you pay tax on the return. Whereas, you are not required to pay any tax on earning from EPF, PPF and ELSS.
Therefore, if you can, avoid tax saving FD and NSC.