Here’s how you can plan your investments to gain maximum savings

Tax saving is something that all of us typically think about only in the last quarter of a financial year. As we enter January, we get an email from our company’s HR department to submit our tax-saving details for the year. This email makes us realise that we haven’t made any tax-saving investment yet. We rush to invest to save taxes and end up making hurried investment decisions.

Sure, even this way, we do end up saving tax. But that shouldn’t be the sole purpose of tax-saving investments. When planned and executed properly, tax-saving investments can help you build wealth over the long-term as well. By their nature, tax-saving investments are long-term and can be used for goals like child’s education or marriage and your own retirement.

Under Section 80C, a taxpayer can invest up to Rs 1.5 lakh in a year to save tax. This is a decent amount to build a corpus of wealth as well. But these investments should not be done in the last few months with little time and after little thought. These investments should be planned and started in the beginning of the financial year itself. Here is how you can plan your tax-saving investments for FY2017-18 to make maximum gains.

Figure out the tax-saving expenses that you can claim

Under Section 80C, there are a number of expenses that qualify as tax-saving deductions. This includes the life insurance premium you pay, school tuition fees for two children, repayment of your home loan, etc. These are expenses that you make anyway and they should be used to save taxes. Figure out how much will be the amount of these expenses. This will help you understand how much of the Rs 1.5 lakh 80C limit you need to invest.

Build a portfolio of tax-saving investments

Once you know how much you will need to invest to fulfil the 80C limit, you should think about where you want to invest that money. There are a number of investment options available, like ELSS funds, PPF, NPS, SukanyaSamriddhi, fixed deposits, NSC, etc. Choose the kind of investment that you are comfortable with, which matches your risk profile and start investing in them right away. It is easier to invest a small amount every month through the year than a big amount in one go at the end of the year.

Make good use of ELSS funds

ELSS funds are equity mutual funds that come with a lock-in period of 3 years. They are considered to be the best tax-saving investment because of the flexibility they come with and the ability to earn inflation-beating returns. Everyone should invest some amount of their 80C limit in these funds. The equity-related risks get mitigated over the long-term and

the returns earned by these funds also become tax-free after a year. Ideally, the younger you are, the more you should invest in ELSS funds.

Link investments to goals

It is always good to have investment goals. With a target in mind, it would become easier for you to choose a tax-saving investment. For example, for a goal like retirement, you can rely on your investments in EPF or PFF. But for a goal that is just 5-7 years away, you can put money in tax-saving fixed deposits or ELSS funds. This way, investments with different lock-in periods can be used to achieve different short-term and long-term goals.

Don’t invest and forget

This is a mistake that many investors do, especially with ELSS funds. It is of no use to check a fund’s performance every single day, but you should at least once in 6 months or a year. You can stop your SIPs in an underperforming ELSS fund any time you want and start SIPs in another ELSS fund to avail the same tax benefit. This flexible nature of ELSS funds should be used to earn optimum returns.

Think beyond 80C

Tax-saving doesn’t end with Section 80C investments and expenses. There are other ways to save taxes that should also be utilized by taxpayers. Medical insurance is tax-deductible under Section 80G. An additional ₹50,000 can be invested in NPS under Section 80CCD. Taxes can also be saved by making certain donations under Section 80G. You should find out about these tax-saving deductions and avail as much benefit as you can.

These are some things that the common taxpayer can do to get the most out of saving taxes this year. But the most important thing is to not procrastinate. Plan your investments and start early.

(The article is authored by Archit Gupta, Founder & CEO, ClearTax.com)