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Tax Planning At The Last Minute (FY 2017-18)

We are barely over two months away from the end of the Financial Year 2017-18.

Hopefully (under pressure from your HR Department), many of you would have completed your tax planning and investments for the year, and feeling relieved. (Though, how smartly it has been done may be debatable).

However, as usual, there would still be quite a few who are yet to begin this annual ritual.

Everyone loves to hate tax. But regrettably there is no escape from it.

In fact, the more you delay, the more painful it gets:

As you are aware, investments that enable you to save tax are long-term in nature — many times running into decades. As such, a wrong choice now is going to hurt you for many (many) years. 

Even if you make the right choice, the timing of your investment could make a huge difference.

Suppose you decide to invest Rs.50,000 in PPF every year to save tax.

If you make this investment at the end in March every year, you would get back around Rs.13 lakhs after 15 years (assuming a return of 7.5% p.a.). However, if the same investment is done at the beginning of the year in April, you will end up with about Rs.14 lakhs — a clear gain of aroung a lakh of rupees.

Thus, it makes ample sense to begin tax planning in April itself; and not wait till the end when the axe is about to fall.

Likewise, if you plan to invest in ELSS, it's best to spread out the investment through the year. Investing one-time lump sum money in these equity-linked products is definitely very risky. Especially in conditions like today, when the market valuations are quite expensive. 

So that's Lesson No.1 for the habitual late latifs... tax planning must begin in April itself.

So remember, your next date with tax is April 2018!

Don't be lured by insurance policies to save tax at the last minute.

Lesson No.2 is that you must NEVER fall prey to the attractive advertisements and the persuasive sales pitch of the insurance agents. This would probably be the worst financial mistake you will ever make.

You can take the following course of action, to not only save tax, but also make a better investment for you and your family.

[In fact, it should always be other way round — you should first identify investments that are suitable for your financial profile and then check whether you can also save some tax in the bargain.]

Section 80D
Consider health insurance for your family (self, spouse and kids). The amount of premium paid is allowed as deduction up to a limit of Rs.25,000 (or Rs.30,000 if you are a senior citizen).

Consider health insurance for your parents. The amount of premium paid is allowed as deduction up to a limit of Rs.25,000 (or Rs.30,000 if they are senior citizens).

For more details on this section read Health insurance : Double benefit of Insurance and Tax Saving (Sec 80D Updated).

Section 80C
As you would be aware, the limit of tax deduction that you can claim under section 80C is Rs.1.50 lakhs. And, you have a variety of investment options to choose from.

Normally, the following would have already been considered:
(a) your EPF contribution deducted by your employer,
(b) payment of home loan EMIs, which includes some Principal portion and is allowed for tax deduction purposes,
(c) paid the Tuition Fees for your kids, and
(d) paid the premiums for the insurance policies bought in the past.

So, now you have to invest for the balance remaining amount, to exhaust the limit of Rs.1.50 lakhs. 

Among the various avenues available under Sec 80C, Public Provident Fund, Equity Linked Saving Scheme, and "Term" Insurance policy (remember no other insurance policy) are the best options.

1. You can buy a term policy, provided your present insurance cover is not adequate enough. Thus, you would appropriately and inexpensively — term policy will not cost you much — protect your family besides saving tax.

2. Thereafter, depending on your risk appetite and the amount deducted as EPF, you can suitably invest the balance requirement in PPF and / or ELSS.

Howsoever heavy the inducements or pressures may be, preferably avoid ALL other alternatives as they are not as good as the above-mentioned options.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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