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More is not always better while investing to save tax
January, 15th 2013

Most salaried employees are running around to make lastminute investments to save income tax and provide the proof of investments to the employer. This is because most companies ask their employees to submit the proof of their investments in January to avoid deduction of higher taxes from the salary. Last minute tax planning is an ageold practice that forces tax payers to make hasty, and often wrong, decisions. Typically, some individuals invest more than the required amount to save taxes. They also end up parking money in wrong products in the process, which may have an adverse impact on their cash flows and return prospects. It is not surprising that the insurance industry do most of its business during the tax- saving season between January and March every year. "Often we tend to buy products or make investments without doing the due diligence on our total tax structure.

Having a tax plan in place at the start of the financial year will help you make better decisions and even reduce the burden on financials at the end of the financial year," says Nitin Vyakaranam, founder & chief executive officer, Artha Yantra, a financial planning firm.


Tax planning is all about Section 80 C for many individuals. They believe they are claiming all tax break if they invest Rs 1 lakh in some of the usual investment tools like public provident fund, national savings certificates, tax planning mutual fund scheme and so on. But what tax payers don't account for is the employees' contribution to provident fund, children's school tuition fees and the principal repayment of housing loans also qualify for tax deduction under Section 80 C, which is capped at an overall limit of Rs 1 lakh. If you invest anything over and above Rs 1 lakh in ELSS, life insurance, PPF or NSC, it does not give you an extra tax benefit. It is just that your money gets locked in for a certain period which can range from 3 to 15 years in the above mentioned products.

For example, EPF contribution and life insurance premiums are covered under Section 80C apart from the principal repayment of housing loans. That means most regular employees can invest only a few thousands extra under Section 80C. For example, if your EPF contribution is Rs 5,000 per month, it would exhaust more than half of Section 80 C. Add your life insurance premium and you will know how little you can save under the section.

"Typically, your existing investments would include your contribution to EPF, life insurance premiums, housing loan repayment, stamp duty and registration fees paid, children tuition fees, etc. If the sum of all these exceeds Rs 1 lakh, then you don't need to invest further as the deduction is capped at Rs 1 lakh," says Vaibhav Sankla, director, H&R Block, India.

However, if the sum of your tax-saving investments is less than Rs 1 lakh, then you may consider investing the balance amount for additional tax benefits. For example, if your existing investments are to the tune of Rs 60,000 then you can still make additional tax saving investments of Rs 40,000 (Rs 100,000 minus Rs 60,000). "But the tax saving on the additional investment would beRs 4,000 only. In such cases, many tax payers, would rather opt to pay income tax of Rs 4,000 than blocking Rs 40,000 in a tax-saving scheme," says Sankla.

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