The Income Tax Act provides various avenues for tax savings, and it is the responsibility of the taxpayer to strategize and make informed decisions about tax-saving investments. In the past, the conventional approach involved relying on instruments such as PPF, LIC, and NSC for tax savings. However, the contemporary landscape offers a broader spectrum of choices, allowing individuals to select products that align with their specific requirements. Here are five recommendations for making prudent tax-saving investments.

Integration with Financial Plan

A common error is treating tax-saving and financial investments as distinct activities. In reality, they are interconnected. For instance, when opting for tax-saving instruments like PPF or NSC, it impacts your exposure to debt. When determining your debt/equity mix, these considerations must be factored in. Similarly, ELSS contributes to your equity exposure and should seamlessly integrate into your overall equity mix within the financial plan. The primary document should always be your financial plan, and any tax-saving strategies should align with it.

Advantages of ELSS Funds

Tax-saving mutual funds, specifically ELSS funds, offer multiple benefits as tax-saving instruments. ELSS funds stand out due to their relatively short lock-in period of three years, the lowest among Section 80C investments. In comparison, PPF entails a 15-year lock-in, while ULIPs and long-term bank FDs have a five-year lock-in. Beyond tax savings, ELSS allows investors to build wealth through equities, providing a unique advantage not found in other Section 80C investments. While ULIPs also have an equity component, the associated costs are notably higher.

Adopt SIP Approach

While there is a tendency for last-minute rushes when it comes to tax-saving instruments, adopting a systematic approach is advisable. Opt for regular tax-saving instead. For instance, if you plan to invest Rs.1 lakh in ELSS funds during the year, consider converting it into a systematic investment plan (SIP) of Rs.8,000 per month. This approach offers dual benefits. Firstly, it aligns outflows with inflows, mitigating financial pressure. Secondly, it leverages rupee cost averaging, ensuring investors benefit from market volatility.

Utilize Health Insurance Benefits

Health insurance premiums are exempt up to Rs.25,000 for oneself and their family. If one also insures the health of senior citizen parents, the total tax exemption can extend up to Rs.75,000. Viewing health insurance as both an expense and an investment in one’s health is crucial. Given the escalating costs of hospitalization, being adequately insured is essential for protecting one’s financial plan. Economical choices, such as opting for a family floater, can provide comprehensive coverage at a reasonable cost.

Optimize Tax Exemptions in the New Tax Structure

With the introduction of the interim budget in February 2019, all incomes up to Rs.5 lakhs became fully tax-exempt. This rebate, however, applies to the amount after considering all tax exemptions. By leveraging exemptions like the standard deduction of Rs.50,000, Section 80C limit of Rs.150,000, home loan interest of Rs.2,00,000, and health insurance limit of Rs.75,000, one can potentially end up paying zero tax even with an income as high as Rs.975,000. Strategic utilization of tax exemptions can significantly impact your tax plan.

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