Tips for making tax-related investments before March 31


Mumbai: The tax season is here again. It's time to dust up your older investment files, call your tax consultant to quantify the tax-saving investments to be made and decide where you wish to invest this year. Instead of conducting a meticulous exercise, however, most people simply jump at the first product pushed by their neighbour, friend or relative, who also happens to be a distributor.

While it is best to embark on the tax-planning drive right at the beginning of the financial year, many fall prey to last-minute panic and end up with products they don't need. Here are few tips to help you avoid such mistakes this year:

Estimate your tax-saving requirement

In the rush to make their investments before the March 31 deadline, many tend to overlook the ones made by default. Section 80C, which facilitates deductions of up to Rs 1 lakh, includes provident fund (deducted by the employer) and tuition fees paid for children's education too. Often, tax-payers err in not taking these two avenues into account.

This apart, you also need to consider any life policies you may be paying premiums for and repayment of home loan principal, which are also eligible for deductions under this basket. Thus, if you review your portfolio prior to making tax-saving investments, you may realise that no additional effort is required to exhaust the Rs-1 lakh limit.

Ensure your choice of instrument matches your needs

As mentioned earlier, many tax-payers blindly go by the recommendations of their agents or friends, which can prove to be counter-productive later. For instance, if you were to buy a life insurance policy, you need to realise that it will entail a recurring premium payment every year.

It is not a one-time tax-saving affair. So think twice before you buy one, particularly if your sole objective is reducing the tax outgo and you have already adequate life cover. You have to be absolutely sure that you can fund period premium payments over the long-term, if you prefer investment-cum-insurance policies.

This apart, you also need to ascertain when you would need the money invested back. If you are likely to need it in three-four years, you are better off with relatively short-term products. For instance, ELSS funds that entail a 3-year lock-in, 5-year tax-saver fixed deposits and national savings certificates (NSC). Even PPF, for that matter, lets the accountholder to borrow against the deposits after three years and allows partial withdrawals after seven years.

Never borrow to invest

It is not uncommon to hear of individuals who have been left cash-strapped at the time of making investments. To make good the shortfall, they often turn to unsecured loans like personal loans and credit cards and direct the money to tax-break promising avenues.

This could prove to be dangerous should the tax-saving investments made using borrowed funds do not fetch you returns capable of repaying those loans. Besides, such instruments come with lock-in periods, preventing premature withdrawal should the need to clear the loan arise in the interim.

Look Beyond 80 C

Many individuals do not bother to gather information about deductions other than the ones under section 80C. For instance, you can also claim deduction under section 80D for premium paid on health insurance to the extent of Rs 15,000 for self. An additional deduction of Rs 15,000 for health premium paid for parents (Rs 20,000, if they are senior citizens).

Then, if you have a housing loan, you are eligible a tax benefit of up to Rs 1,50,000 on interest paid, under section 24. Repayment of education loan taken for self, spouse or children can also fetch you tax benefits. The entire interest amount paid during the year can be claimed as a deduction section 80E.
source(The Economic Times)