Taxpayers should complete all their tax-saving investments well before the financial year deadline to avoid last-minute glitches. However, the fact is that many take their tax-saving moves down to the wire for a host of reasons. If you’re among them, there are a few tax-saving investment products you can consider. But, before we screen out their list, let’s discuss a few things that you should keep in mind while selecting last-minute tax-saving instruments.
Tax-saving should only be a secondary investment goal
Tax-saving investments should be made strictly in sync with your financial goals. Meaning, even your tax-saving investments should be chosen carefully as per your risk appetite, liquidity needs, commitment period for investment, return prospects, and so on. There are some tax-saving products available in the market which offer low returns and the commitment period is very long, i.e., once you have started investment, you need to continue investing in it every year for a very long term. You might be well-advised to avoid such tax-saving products. Now, let’s find out some attractive last-minute tax-saving investment options available in the market.
If investment risk is a big concern for you while planning your last-minute tax-saving investment plan, the Employees’ Provident Fund (EPF) could be an attractive option for you. EPF is a super-safe tool that’s currently offering an interest rate of 8.6 per cent per annum, which is higher than many popular tax-savers like the Public Provident Fund (PPF). You can exhaust the remaining threshold available under Section 80C of the I-T Act to maximise the tax-deduction benefit of up to Rs1.5 lakh. An investment higher than the minimum threshold under EPF can be made through the Voluntary Provident Fund (VPF) mechanism. Both EPF and VPF come with similar return benefits. Also, investment into EPF/VPF comes under the EEE category from the taxation perspective, meaning the amount you invest, the interest you earn and the corpus you receive on maturity are all exempted from tax. Lastly, you can invest as much as 100 per cent of your basic salary plus dearness allowance in VPF.
But, do note that EPF corpus can be withdrawn before retirement only for specific requirements like prolonged unemployment, the marriage of self, children or siblings, higher education of self or kids, construction of a house, medical emergency, etc. if you meet the other terms and conditions.
If you are ready to take some investment risk and your investment horizon is for a very long term then investing in Equity Linked Savings Schemes (ELSS) can be a good idea. Young taxpayers with a high-risk tolerance can opt for a high-rated ELSS scheme. While investing, you may want to diversify your money into two or three types of ELSS funds to reduce the overall risk. You may initiate a Systematic Investment Plan (SIP) in the selected ELSS funds to accomplish your tax-saving and financial goals in the next financial year as well and get the benefit of rupee cost averaging at the same time. However, do note that the long term capital gains (LTCG) from ELSS investments exceeding Rs. 1 lakh are taxed at a 10% rate. ELSS investments also have the lowest lock-in among tax-saving investments, of just three years.
If you have already exhausted the investment limit available under Section 80C, you can invest an additional Rs 50,000 in the National Pension Scheme (NPS) under Section 80CCD (1b) to maximise tax deduction benefits. However, remember that NPS requires a very long-term commitment. So, invest in the NPS only when you don’t have an immediate requirement of such invested funds and when it is aligned with your retirement goal.
Use your home loan repayments
If you’re servicing a home loan, you may not want to make additional last-minute investments to reduce your tax burden because a home loan is one of the biggest tax-saving investments out there. While your loan principal repayments qualify for Rs1.5 lakh tax deduction benefit under Section 80C, interest payments up to Rs 2 lakh can be used to claim tax concessions under Section 24B. On top of that, if your home loan got sanctioned in FY2016-17, you can claim additional tax deduction benefit up to Rs. 50,000 on interest payments under Section 80EE if you meet the other eligibility requirements. And if your loan for an affordable house got sanctioned in FY19-20, you can claim additional tax deduction benefit up to Rs1.5 lakh on interest payment under Section 80EEA if you meet the other riders about property value and property carpet area. What’s better is that Union Finance Minister Nirmala Sitharaman announced in her Budget-2020 speech that 80EEA benefit deadline has been extended by another year, i.e. you can now avail this benefit until March 31, 2021.
Apart from the points mentioned above, you should also focus on exhausting the various allowances provided by your employer that can save you taxes. If there is interest pending on the education loan for self or your children, you can clear it to get the deduction benefit under Section 80E. There is no upper ceiling to claim the deduction under Section 80E for payment of interest under education loan.
Lastly, it would be worthwhile to point out that the finance minister recently proposed a new, optional tax regime from FY20-21 wherein taxpayers can avail of discounted slab rates by forgoing a majority of traditional tax concessions. That means from the next financial year, if you decide to opt for the new tax system after due tax calculations, you won’t be able to claim tax deductions under Section 80C which includes some investment options mentioned above like EPF/VPF, ELSS, and even home loan principal repayments. While doing so may help you reduce your tax outgo, you’ll be well-advised not to discontinue essential investments and insurance purchases just because you can no longer avail any tax incentives on them. In fact, the new tax regime, and any saved money in taxes, should help you invest and insure freely without having to worry about tax-saving goals and in line with your financial goals and risk tolerance. Because as investments are crucial to adequate wealth creation, insurance is superlatively critical to protect your family’s financial interests against life’s vagaries.
The author is CEO, BankBazaar.com