We all spent a tremendous amount of time mugging in various investment schemes to cut our tax outgo at the end of the last fiscal year but it is not wise to rush at the last minute to save tax. We must plan our investments at the start of the year.
Table of Contents
1. Invest the Increment
This is the time when most of us get our annual increment. With the increase in income, expenses tend to increase but one must not go on spending the increment in futile things. The increase in income should also reflect in increasing savings/investments. At least 20% – 25% of the hike shall be invested every year to reap the full benefit. The investment can be done in a lump-sum manner or via an increase in SIP amount.
2. Invest in PPF/VPF
Ask your employer to deduct a higher amount under the Voluntary Provident Fund. The VPF contribution earns the same interest as well as is also eligible for tax benefits as EPF however; your employer is not bound to contribute the same as under EPF. The best thing with VPF is that you will get the salary after deducting the contribution and thus you won’t need to give a second thought in investing.
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If you are not covered under EPF then go for Public Provident Fund. The interest rate is a bit lower in PPF in comparison to EPF/VPF but one should invest in the provident fund (either PPF or EPF) because it fulfils the requirement of debt portion to balance your investment portfolio.
3. Invest in ELSS
ELSS fund fulfils the part of equity portion in the portfolio. Similar to increasing the VPF/PPF amount, you must start investing in ELSS or if already investing, increase the SIP amount of investing in ELSS funds. But please note that lump-sum investment in ELSS funds gets locked-in for three years i.e. you cannot redeem before three years, similarly, each of your SIP is individually locked-in for three years.
Do remember not all mutual fund investment will give you tax benefits, the amount invested in Equity Linked Savings Scheme only will provide the tax benefits.
4. Open NPS Account
With the various changes made time-to-time, NPS has become another good government-sponsored pension scheme to save tax. In Budget 2015, NPS was introduced to give an additional tax-saving of Rs.50,000 under section 80CCD(1b) over and above Rs.1,50,000 under section 80C.
The scheme is available for all the Indian Citizen between 18 to 60 years of age. The tax benefit under NPS is up to 60% of the accumulated corpus can be withdrawn as a lump-sum on maturity which is completely tax-free while the remaining 40% corpus has to be compulsorily annuitized which is taxable in the year of receipt as income from other sources.
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5. Submit form 15H/15G
Submit an online form 15G/15H if your total interest from the fixed deposits is above the TDS threshold limit but your total income from all sources is below the basic tax exemption slab of Rs.2,50,000 or Rs.3,00,000 as the case may be. Most of the banks have started accepting form 15G/15H online but in case your bank is not entertaining online form then do visit the bank branch and submit the required form in the first week of April only to avoid the hassle of filing the income tax return to claim the tax refund later on. The threshold limit for deducting TDS under section 194A i.e. TDS on interest has been increased from Rs.10,000 to Rs.40,000 for persons below 60 years of age and for senior citizens the threshold limit has been increased to Rs.50,000 p.a.
6. Setup Contingency/Emergency Fund
The amount equivalent to your 6 months expenses shall be kept in the savings account or can be invested in liquid funds or an ultra-short-term debt fund for emergency need. This emergency should suffice your emergency need without affecting your long-term investments. The emergency funds should include day-to-day expenses as well as all your EMI’s. An emergency corpus is generally needed in case of switching of jobs or at the time of not able to go on work due to some medical urgency. Any bonus or lump-sum incentive received at the year-end shall be deployed as a contingency fund.
7. Realign Medical Cover
Most of the people forget to relook at the medical cover or mediclaim policy at the start of the year. The medical cover should be adjusted as per the growing inflation. Further, in case, there is an addition of the member in your family then you must enhance your cover to balance your medical needs. The absence in realigning of the medical cover can put a severe dent in your long-term investment portfolio.
8. Save for Leisure
Savings does not necessarily mean investing. One should also save to plan long travels or spend leisure time at regular intervals with family. Similar contingency fund, travelling funds can also be invested in liquid funds or an ultra-short-term debt fund which ensures that the money reaches your bank account within a day of redemption. One should assess the fund requirement at the starting of the fiscal year and contribute each month to meet the targeted fund.
9. Wait for Better Opportunity
Staging or staggering your investment throughout the year provides flexibility to invest in better investment opportunity such as tax-free bonds etc. which comes rarely in a couple of years. However, it is good to start tax-planning at the starting of the year but that does not mean the entire tax-planning should be carved out at one go.
2019 Being an election year, there might be some additions and deductions in the full year budget which is scheduled to come in July, for instance, if basic exemption limit enhances to Rs.5 lakh then taxpayer falling under this income group need not plan any investment or in case of budget increases the deduction limit under section 80C to 2 lakh from existing Rs.1.50 lakh then taxpayers need additional funds to reap the benefits. So sometimes wait and watch strategy is also good for better investment planning.