As the fiscal year 2023-24 draws to a close, many individuals are rushing to make last-minute investments to reduce their income tax outgo. However, it is important to make wise investment decisions and avoid common mistakes. Here are some tips to help you make the most of your tax-saving investments.
Firstly, check if you have already exhausted the Section 80C limits. Section 80C offers various popular tax-saving instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), and five-year fixed deposits (FDs) that offer tax deductions. However, the total limit for Section 80C is Rs 1.5 lakh. If you are a salaried taxpayer and contribute to the Employees’ Provident Fund (EPF), it will also be considered under Section 80C. So, calculate the deductions of your existing investments before making new ones.
Additionally, it is crucial to consider the tenure of your investments. While tax-saving investments come with lock-in periods, some have longer tenures. For example, PPF has a lock-in period of 15 years. Therefore, you should align your investment decisions with your short-term and long-term financial goals.
Furthermore, it is essential to understand the tax deductions and benefits of investing in the National Pension System (NPS). You can claim tax deductions under three sections of the Income-tax Act, namely 80CCD(1), 80CCD(1B), and 80CCD(2). Section 80CCD(1) allows a deduction of up to Rs 1.5 lakh for investing in NPS, while an additional deduction of Rs 50,000 can be claimed under Section 80CCD(1B). Private sector employees can invest up to 10% of the basic pay in NPS and claim an additional deduction under Section 80CCD(2), which can go up to Rs 7.5 lakh.
On the other hand, it is advisable to avoid buying life insurance as an investment solely for saving taxes. While life insurance policies provide guaranteed returns and tax-free maturity, their average returns are relatively low, around 5-6%. It is better to opt for pure term plans to secure the future of your loved ones rather than investing in moneyback policies or guaranteed return plans.
Lastly, evaluate whether the old income tax regime or the new income regime suits your needs. Many deductions mentioned above are only available in the old regime. If you choose the new income regime, you can still benefit from investing in NPS under Section 80CCD(2).
In conclusion, while making last-minute tax-saving investments, make sure to avoid common mistakes and follow these tips for optimal results. Evaluate your existing investments, consider the tenure of new investments, understand the benefits of NPS, avoid insurance-cum-investment policies, and choose the tax regime wisely. By doing so, you can effectively reduce your income tax outgo and achieve your financial goals.
