January is here and HR department of your company would have sent by now emails asking for proof of tax declarations that you made in the beginning of the financial year.
Since most of us a love to wait till the last minute to make any investment for the purpose of saving any tax we are caught unaware by these emails and haphazardly make investments which may not fit in our long term financial goals. So we may end up buying products that are either totally ill suited for us or do not match our risk profile.
Relying on the expert advice of your LIC or mutual fund agent is not a very good thing. As we have seen in the Citi bank case the financial adviser may have his own interest in mind rather than yours.
So what to do?
I am giving below some simple steps that one needs to follow to reach to the right product selection for the purpose of tax savings. Please remember these are generic steps and the actual financial decision you should take after proper calculations and keeping your personal circumstances in picture.
- Check with HR/Finance department how much you need to invest. You may have received an increment since last year or have added some other source of income which could be taxable e.g interest from the FDs, rental income etc.
- Decide for how long you want to invest. If you want to invest for less than 3 years then you are out of luck as no tax savings product has a lock in period of less than 3 years. So if you need the money in next 3 years forget the tax savings and put the money in liquid, low risk product like FD or debt mutual fund. Don’t even consider equity or equity linked mutual funds for the same.
- From the total amount you need to invest reduce the total investment already made e.g any insurance premium that you have already made, any EPF contributions that you are making through your employer. Any donations that you may have made that will be reduced from the total income. ( Please check with your finance department if they will allow the credit in form 16 or you have to get it in you tax return)
- Now you will have the total amount that you need to invest in the tax savings products.
- Calculate any prior commitments that you may have for any tax savings instrument like LIC or other insurance policies. This will get subtracted from the total amount.
- Now say you have 40K to be invested further in the tax savings products.
- Check if you are adequately insured. If there are insurance gaps in your portfolio first thing you should go amongst the tax savings instrument is to go for a cheap online term insurance.
- If still some amount is left and you are willing to invest then go for Tax Saving Equity funds. If you are not willing to go for Equity schemes you can go for other instruments like NSC etc. But normally they should be taken only in the end once your insurance, PPF and Tax savings equity schemes have been covered.
- Once you have 1lakh Rs invested and you still have some more tax obligation you can then look at Infrastructure bonds where you can invest another 20K over and above the 1L limit in normal tax saving instruments.
- Do not invest in tax savings instruments more than you need to, because you will not get any additional tax benefit and your money would be still locked and not available to you during the locking period.
- Collect the receipts for all investments and submit the photocopies to your companies finance/HR department.