Tax planning is an art to reduce your tax outgo by making sure that all the applicable provisions as given under the income tax act to reduce your tax liability have been availed of. Tax planning ensures the optimal minimisation of the tax liability within the law frame and also takes care of your short and long-term financial planning. There are many tax provisions like section 80C, 80D or claiming the benefits of HRA, LTA claims, etc. It is highly advisable to do your tax planning so that you can save every penny possible as allowed within the framework of our law.
If you look at the list mentioned in Table 1, you can see there are multiple investments options you can invest in to get tax deduction. There are few expense items which also gives you tax savings like tuition fees, home loan principal or medical premium, etc. and few like provident fund which automatically gets deducted from your salary. Let us understand it in simple terms as follows:-
Provident Fund (Employee): Provident fund gets deducted directly from your salary and your contributions towards voluntary PF will also be considered for tax deduction.
PPF: PPF investments comes with 15 years lock-in period with an extension of further five years every time; you can withdraw partially as well.
Tuition fees: Tuition fees paid for your children’s education can also be claimed for up to two children.
Housing loan principal repayment: Payment of principal amount towards your home loan will also be considered but not towards your interest on home loans.
National Savings Certificate (NSC): Investments towards NSC will be claimed as a deduction but be cautious about its interest which is taxable.
Mutual funds ELSS: It has one of the lowest lock-in period of three years, but in case of a monthly SIP, each SIP instalment has to complete three years lock-in.
National Pension System (NPS): You can claim up to Rs 1.5 lakh for your Section 80C investments (including NPS), and an additional up to Rs 50,000 for NPS contributions under Section 80CCD(1B).
Life insurance premium: Premium paid on any life insurance policy for yourself, spouse and children can be claimed and not for any other person.
Bank fixed deposits: FD with scheduled bank for more than five years can only be deducted.
Unit Linked Insurance Plans (ULIPs): Market link policies offered by insurance companies with the lock-in period of five years can be claimed and earned gain after post lock in is exempt from Tax.
Senior Citizen Savings Scheme (SCSS): Investment in SCSS also qualifies for deduction under Section 80C.
Which investment products to invest in to optimise your tax planning?
For this you need to calculate your risk appetite, overall financial standing and your financial goals. Based on that you need to select the right product which also helps you meet your goals apart from tax saving. So that way you will be able to optimise your returns greatly. It has been observed in general that equities have the ability to beat inflation. So if your risk appetite is good then you should invest most of your 80C investments in mutual funds ELSS than any other product as it has the potential to give you 15% returns or more.
The writer is a chartered accountant and chief gardener, Money Plant Consultancy