Income tax: Plan your tax savings in advance; Here's how to do it

Isn’t it too early to talk about the end of the financial year, i.e., 31st March 2023? If you consider the time left, then yes, it’s a bit early as we have close to 5 months. But if you consider the common behaviour of people who rush to save taxes at the last minute, then this is a good time to have a wake-up call.

Many individuals don’t plan their tax savings in advance and as a result, rush to do so when their employers ask them to submit tax-saving proofs.

But that is not a prudent approach. When short on time and pushed, chances are that people grab the first opportunity (read product) that comes in front of them to save tax. And more often than not, this results in wrong product selection or random investments every year, just to save taxes. The result is that after a few years, you end up with an assortment of unrelated small investments that you made to save taxes in each of the previous years.

So, with still some time at hand, it’s better to start now if you still haven’t.

First calculate how much tax-saving investment is required

You are already making certain savings contributions (or expenses) that are eligible for tax saving. Under Section 80C (which has a limit of ₹1.5 lakh), your EPF contribution, home loan’s principal repayment, life insurance premiums, tuition fees paid for your children are already covered.

Suppose you have the following numbers in the above example –

• Annual EPF Contribution – ₹36,000
• Life Insurance Premiums – ₹14,000
• Son’s School fee – ₹40,000

This totals to about ₹90,000. So, there is a shortfall of ₹60,000 under the ₹1.5 lakh limit of Section 80C.

Now if you wait till March 2023 to save tax at the last minute, first you might face a cash crunch as you will have to shell out ₹60,000 in one go. The other issue is where to put that amount in one go.

To solve this dilemma and without being arm-twisted by the lack of time, it’s better to start now.

How?

You have ₹60,000 to invest/spend towards tax savings under Section 80C. Then there is more tax to be saved if you invest ₹50,000 in NPS (under Section 80CCD) and ₹25,000 towards health insurance premiums (under Section 80D).

So, in this example, you have ₹1.35 lakh in total to spend/invest to save taxes/ And right now, you have about 5 months.

Here is how you can go about it 

• If you are not covered under your corporate health insurance or if that is inadequate, then you should immediately purchase a family floater health insurance. Ideally, one that gives a cover of at least ₹15 lakh. The premium you pay for it is eligible for ₹25,000 tax savings. But if the premium is higher, then you still get tax benefit up to ₹25,000 only. This is a low-hanging fruit and you can do this quickly under Section 80D.
• Assuming you want to invest in NPS, you can get benefits up to ₹50,000 under Section 80CCD if you invest exclusively in NPS. So, you can start investing ₹10,000 monthly over the next 5 months to take care of this. From next year onwards, you can do a monthly about ₹4200 investment in NPS to further automate this tax-saving investment.
• Now comes the gap of ₹60,000 in Section 80C in our example above.
• For this, if you don’t have proper term insurance coverage (at least a cover of ₹1 crore), then get yourself one first. Let’s say you buy a ₹1 crore term plan for ₹15,000 annual premium.
• Now you need to set aside another ₹45,000 under Section 80C.
• For this, you first need to decide which asset you want to invest in. And this decision should be driven by your goals, your risk appetite, and your time horizon.
• If you choose debt, then go for a simple PPF. You can invest about ₹9-10,000 over the next 5 months each and this will take care of your Section 80C gap. If you have a surplus of ₹45-50,000 available, then you can even invest in PPF in one go.
• If you want to go for equity then, tax-saving ELSS funds are your go-to option. And when investing in equity, best to invest regularly via SIP. You can invest ₹9-10,000 monthly over the next few months in one of the good ELSS schemes. And from next financial year, you can again do a fixed SIP of a smaller amount from the start itself (with 12 months at your disposal) to take care of this more smoothly.
• Another option next year can be that you ask your employer to increase your provident fund contribution via VPF. That way, more money gets invested at a solid 8.1% rate which is quite decent for sovereign debt.

That’s how you can go about it. For people with other different numbers, the approach might differ. But in general, always make sure that you make your tax-saving investments in a manner that they are in line with your financial goals and in suitable instruments. Don’t randomly put money in anything just to get rid of your tax-saving headaches. Plan for it from the start of the financial year and it will be a smooth exercise.

Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.