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7 tips to SAVE MORE TAX in 2021

By HARSHAD CHETANWALA
March 03, 2021 08:54 IST
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Plan these investments well rather than just doing random investments at the beginning of the year or rushing in at the end, advises Harshad Chetanwala, co-founder, MyWealthGrowth.

Illustration: Dominic Xavier/Rediff.com

As March approaches, both salaried and non-salaried professionals think about the various means and ways to can save tax.

While there are different options to save tax, the key is to do tax planning in such a way that help you to save tax and plan for the future.

The most common way is investing under Section 80C and availing tax benefit under Section 80D.

Section 24 is also equally known because of tax rebate on home loan interest payment.

This is by far the most popular section of the Income Tax Act that every taxpayer knows about and tries their best to invest in this section for the maximum Rs 150,000 of deductions that are allowed under this section.

This section offers host of options for tax payers like EPF, PPF, Insurance Premium, ELSS, Tax Saving Fixed Deposits, Home Loan Principal payment, Sukanya Samriddhi Yojana, etc.

One approach that can work for you is to plan these investments well rather than just doing random investments at the beginning of the year or rushing in at the end.

Let us look at some of these tax saving instruments and how you can use it effectively.

1. Employee Provident Fund

The deduction from your monthly salary towards EPF can help you build a huge corpus for your retirement which often appears too far.

But believe me, time runs equally fast.

Your investment in EPF has the potential to earn better returns compared to other debt investments as the returns are backed by the Government of India.

If your contribution in EPF is reasonable then you can treat this as your debt allocation at the same time avail tax benefit unser Section 80C.

If you have any outstanding liabilities like home loan and/or your cash flow is getting too tight, then you may like to opt for minimum contribution towards EPF, else it can be looked at as a good investment option from long term benefit perspective.

2. Public Provident Fund 

Like EPF, this investment also falls under the debt asset class and quite popular in the Section 80C category.

PPF is also a long term investment that offers attractive rate of interest.

PPF investment also offers you the flexibility to invest the amount that you wish to avail tax benefit, unlike EFP where the contribution is pre-decided at the beginning of the financial year.

PPF works for those investors who wish to have some allocation in debt with reasonable returns.

PPF account have 15 years lock-in compared to EPF which can be withdrawn only in case of change of job or at the time of retirement.

If you wish to withdraw from PPF before 15 years, the scheme permits partial withdrawals from year 7 -- on completing 6 years of regular annual investments. Thus, offering some flexibility compared to EPF at the same time.

3. Life Insurance Premium

Your life insurance premium also help you save tax under Section 80C.

This aspect of tax saving needs more attention as you may end up buying any insurance policy to save tax.

There are different kind of insurance plans like Term insurance, Endowment, ULIP, etc.

One thing that will help you to buy the right kind of insurance is to keep insurance and investment separate.

The purpose of insurance is to replace the financial loss in case of unfortunate event of death and hence should not be looked as an investment by opting for Endowment, ULIP or any other insurance for sake of saving tax.

Hence, it may make a perfect sense to get yourself adequately covered through a term plan and use the premium paid for tax benefit as well.

4. Equity Linked Saving Scheme/Tax Saving Funds

ELSS fall under the equities asset class and are a good option to invest and save tax.

With a lock-in of 3 years an ELSS fund allows you to build wealth while claiming the tax deduction for investments made in that year.

If you are at the stage where your monthly investible surplus is limited and at the same time you also have to invest for saving tax then ELSS can work well for you.

Here, you can create wealth by investing in equities and save tax at the same time.

It offers maximum flexibility because of lock-in period of just 3 years, you can continue to hold that investment for longer period as well.

For investors who are beginning their career, ELSS can take place of Equity Diversified Mutual Funds as this can work in both ways for them as well.

SIPs in ELSS can be a good tool to start tax planning from the beginning of the financial year.

One thing to keep in mind for ELSS investment is that the fund will have to always have 80% invested in equities, thus increasing the risk when compared with other tax saving options.

5. National Pension Scheme

NPS offer tax benefit under Section 80CCD and gives you an opportunity to save tax by making additional investment of Rs 50,000.

This is in addition to the limit of Rs 150,000 under section 80C. NPS encourages people to invest in a pension account at regular intervals during the course of their employment.

Investments under NPS can be invested in equities and debt instruments, thus offering the flexibility to invest in different asset classes.

The issue with NPS is that the investments you make are locked in until the age of 60. And when you reach the age of 60, you can withdraw a maximum of 60% of your corpus.

The remaining amount (40%) has to be invested in annuities which will give you monthly pension post your retirement.

Whenever you plan to go for NPS please keep in mind the long lock-in period and mandatory investment of 40% of total accumulated corpus in annuities.

6. Housing Loan

If you have taken a home loan, then you are entitled to claim the deduction for repayment of the principal amount under Section 80C, as well as the interest of the home loan u/s 24.

The maximum deduction allowed is Rs 200,000.

Many taxpayers look at the tax deduction on interest of home loan as a good opportunity to save tax. Hence, they prefer to continue with their home loan for a long time.

While it is good to use the opportunity to save tax up to its fullest potential, it may be a good strategy to bring the outstanding of your home loan to an optimum level to get the best from this benefit.

It is often seen that many people do not initiate any prepayment or part payment just because the home loan gives them tax benefit.

7. Medical Insurance 

The premium paid towards medical insurance policy also qualifies for tax benefit up to the amount of Rs 25,000 under Section 80D.

Many people usually rely on medical insurance provided by their employer, but it may be prudent to have personal medical insurance or family floater as well.

Safety is important for every family and hence you should opt for proper medical insurance which offers sufficient cover for your family.

Avoid just going for any medical policy for sake of tax benefit, evaluate your family's needs and then take it ahead.

The total deduction of Rs 25,000 include you and your family is a good amount to ensure proper medical cover. This must be looked more as a necessity rather than tax planning.

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