Three steps to smoothen your tax planning at the last minute
Most salaried investors hurry to make their tax-saving investments only when they are prompted from their employers to submit proofs of their tax-saving investments. In case you are unable to present these investment proofs, the employer snips out tax deducted at source (TDS) in the last 3 months of the financial year, i.e. January, February, and March. You can claim a refund for this tax when you file your income tax return in case you end up investing before the deadline for that financial year but was unable to upload the investment proofs.
Of course, end-moment tax-planning is often frowned upon investors. This will ensure that you avoid the strain of your finances at the last moment and also help you spread your investments. However, if you have still not made your tax-saving investments for this financial year, fret not.
Here are three steps that will smoothen your tax planning at the last minute:
- Do the math
It is vital to evaluate the amount you actually need to invest. To calculate this, ponder on the several deductions that are available to you due to certain mandatory investments or expenses. For instance, Section 80C of the IT Act, 1961 allows a tax deduction of up to Rs 1.5 lac p.a. You might include your EPF (employees’ provident fund), tuition fees for up to 2 children, principal repayment towards a home loan, etc. Once you have this figure, you can invest to lump the shortfall. For instance, if your EPF, tuition fees, and home loan add up to Rs 1.2 lacs, you need to invest another Rs 30,000 to exhaust your Section 80C limit.
- Choosing the right type of investment
You might consider analysing your tax-saving investments or four primary parameters, namely, expected returns, lock-in period or liquidity, risk involved, and taxation. One might say that the best tax-saving investments enjoy the EEE (exempt exempt exempt) tax status. PPF (Public Provident Fund) and EPF enjoy the EEE status. However, both these investment options have a lock-in period of 15 years and 5 years respectively. Another good alternative is ELSS tax saving mutual fund. These mutual funds have a lock-in period of just three years. This also happens to be the shortest lock-in period among Section 80C investments. An investor can save up to Rs 46,800 by investing in these tax saving mutual funds. As investing in mutual funds deliver market-linked returns, so does ELSS investments. However, they have a huge potential to deliver significant returns, even double-digit returns when invested for a long duration.
- Make a budget
Saving at the last moment is likely to create a strain on your finances. Thus, it is essential to create a budget for these last three months. Evaluate your expenses, which includes your liabilities and utilities. This will help you to assess how much you have left to invest.
Just like any other mutual fund investment, make sure that your tax-saving investments are in line with your financial goals, risk profile, and investment horizon. Hence, it is important to choose the right instrument for your portfolio. Happy investing!