Equity-linked savings scheme, PPF and Sukanya Samriddhi Yojana are recommended instruments.
If you haven't done your year's tax planning yet, there's still time to take advantage of the deductions the government offers.
There could be reimbursements you might not have claimed. Rather than wait until March, you can present the bills now and use the reimbursement money to do tax planning.
Similarly, if you have idle money in a savings bank account that's inactive, close it and use the funds for planning tax.
"Don't let go the opportunity to save tax only because you are late. If a person in the highest tax bracket manages to get Rs 1 lakh deduction and thereby saves Rs 30,000 in tax, that's like getting 30 per cent instant returns on an investment of Rs 1 lakh," says Amar Pandit, chief executive (CEO), My Financial Advisor.
He says an individual can even use an idle fixed deposit to plan tax, if there's no liquidity issue and no near-term financial commitment.
It's also important that you put the money in the right instruments. Investing haphazardly at the last minute is the biggest regret most people (30 per cent) have, according to a survey by BigDecisions.com.
A fifth say the other mistake they made was purchasing one more insurance product. And, not buying adequate health insurance is the third biggest regret.
Consistent mistakes over years can create liquidity issues in the past two months of the financial year. Biju Kutty, employee of an information technology company, has fallen prey to this.
Due to several years of last-minute tax planning, he now has to pay for a health insurance, a term insurance and a unit-linked insurance plan (Ulip) in February and March. "Along with a home loan, keeping necessary funds for these two months is a challenge," says Kutty.
Right selection
Before shortlisting the right products, check the amount that is already exhausted by the Employees' Provident Fund (EPF).
Of the Rs 1.5 lakh available for deduction under the income tax law's Section 80C, for various investments and expenses, EPF is a forced investment for salaried.
Subtract the amount that the employer deducted for EPF from Rs 1.5 lakh to check the available limit. The next instrument to look at is home loan repayment.
The principal paid towards a home loan, up to Rs 1.5 lakh, can be claimed as deduction under Section 80C.
Most taxpayers usually exhaust their Section 80C limit with EPF and a home loan principal, says Archit Gupta, Founder and CEO, ClearTax.
Taxpayers can also claim a deduction on tuition fees for a maximum of two children. This can be claimed for full-time courses at a recognised institution within India.
Protection first: Before making investments, one should first look at insurance, especially if you are the bread earner and have dependants, says Lovaii Navlakhi, chief financial planner at International Money Matters.
Opt for a health insurance plan, along with the one from your employer. This will prevent your finances going haywire if you don't have a job and incur a huge medical expense.
You can claim deduction up to Rs 25,000 under Section 80D for money paid towards Mediclaim. Also, go for an online term plan, as it is cheaper and gives a high cover. The premium paid can be claimed under Section 80C.
ELSS: For any shortfall in exhausting Section 80C, first look at an equity-linked savings scheme (ELSS).
Dinesh Rohira, founder, 5nance.com, says among tax-saving instruments, it has the lowest lock-in and the potential to deliver better returns in the long term.
But, don't invest all the money at one go - use a systematic investment plan. Go for a monthly investment amount that you can sustain in the future.
PPF: The remaining shortfall should be diverted to Public Provident Fund (PPF). Manish Shah, co-founder, BigDecisions, says it is one of the traditional yet highly preferred, retirement planning investments.
The best part is that taxpayers can invest money at one go. It's preferred for retirement planning, as there's a 15-year lock-in and proceeds are not taxed on withdrawal.
Sukanya Samriddhi Yojana: This scheme is for parents with a girl child below 10 years. Suresh Sadagopan, founder of Ladder7 Financial Advisories, says they advise clients to opt for it, as the interest rate of 9.2 per cent is better than all other government-backed guaranteed schemes.
Other products: Though popular, a tax-saving bank fixed deposit (FD) should be avoided, unless you are a retiree or about to retire.
Financial planners say other instruments such as PPF and ELSS give better returns and the proceeds are not taxed, unlike tax-saving FDs. Sadagopan says National Savings Certificate can also be avoided; they suit individuals who stay in unbanked areas.
Mutual funds (MFs) have also started offering retirement schemes. Reliance MF has a scheme called Retirement Fund, launched around a year earlier.
HDFC has a new fund offer for a Retirement Savings Fund that will close on the coming Friday. These are like ELSS but with a longer lock-in period and an exit load if a person withdraws up to a certain period.
Financial planners say these funds have a limited track record and might be avoided.
Pension plans from insurance companies are also not recommended. Arvind Rao, a certified financial planner, explains that two-thirds of the accumulated corpus needs to be converted into an annuity, which makes these unattractive, compared to other products available under Section 80C. Unit-linked insurance plans and traditional insurance plans get a thumbs-down from all investment experts.
NPS: The government gives an additional deduction of Rs 50,000 for the National Pension System under Section 80CCD (1B) but opinion is divided on investing in this.
For some financial planners, the scheme is unattractive, as a person will need to pay tax on the proceeds on withdrawal.
Sadagopan hopes the government makes the proceeds tax-free, as it doesn't provide any social security. He is advising clients to open the account and invest small sums, as of now.
Don't forget these benefits
Those who have bought a house also get a deduction on the interest portion of the home loan under Section 24.
If they are staying in it, this is restricted to Rs 2 lakh. If the flat is let out, the entire interest portion can be claimed as deduction.
Taxpayers with annual income less than Rs 5 lakh can also claim a maximum rebate of Rs 2,000 under Section 87A.
If your parents are senior citizens and you pay for their health insurance, you can get a deduction of Rs 30,000. In the case of parents over 80 years, who might not be eligible for insurance, medical expenses up to Rs 30,000 can be claimed.
The maximum deduction which can be claimed for both parents is limited to Rs 30,000.
Taxpayers can claim additional deductions for parents over 80 years for medical treatment if they are suffering from specified diseases (such as cancer or neurological illness).
