Want To Plan Your Tax Savings? Read This

The most common mistake is investing without assessing suitability and long-term implications.

With barely weeks left before the financial year ends, the window for effective tax planning is closing fast.

For investors who have opted for the old tax regime, this period often triggers a rush to complete tax-saving investments.

But experts warn that purely deduction-driven, last-minute decisions can have lasting financial consequences.

Key considerations

The first step is to determine whether the old tax regime is truly beneficial for you.

"Often, taxpayers lock themselves into unsuitable products just to cut taxes. Sensible tax planning should strengthen financial discipline and long-term financial stability, not undermine it," says Vishwas Panjiar, founder, SVAS Business Advisors.

Avoid locking up too much money in tax-savers with low liquidity.

"While tax saving matters, it should never come at the cost of strained cash flows," says Santosh Joseph, founder and chief executive officer, Germinate Investor Services.

Provident Funds

Employees' Provident Fund (EPF) and Voluntary Provident Fund (VPF) work on similar lines.

"Under EPF, both employee and employer contribute. VPF is a voluntary top-up made only by the employee without any matching contribution from the employer. It allows employees to channel a higher share of their salary into disciplined, long-term savings at source. The withdrawal, lock-in, and taxation rules are the same for both," says Joseph.

Both EPF and VPF are dependable options for salaried individuals, offering capital safety, disciplined savings and favourable tax treatment.

"Contributions qualify under Section 80C of the Income Tax (I-T) Act. Withdrawals are largely tax-efficient. The main drawback is limited liquidity, with an effective lock-in until retirement. Returns are stable but policy-driven and may seem moderate over time, making them better suited for conservative investors rather than high-growth seekers," says Panjiar.

Public Provident Fund

PPF is a government-backed, long-term savings scheme that offers capital protection and a return of 7.1 per cent.

"It enjoys exempt-exempt-exempt (EEE) tax status, with contributions eligible for Section 80C deduction and interest income being tax-free on maturity," says Sanjoli Maheshwari, executive director, Nangia & Co.

She adds that with a 15-year lock-in and limited liquidity, PPF suits conservative investors seeking low-risk, tax-efficient, long-term savings.

Equity linked savings scheme (ELSS)

ELSS offers Section 80C benefit along with higher growth potential due to equity exposure.

"It has the shortest lock-in among tax-saving instruments at 36 months and allows systematic investment plan (SIP) investments. While ELSS has delivered strong long-term returns, it comes with market volatility, making it suitable for investors with a long-term horizon who are comfortable with equity risk," says Joseph.

National Pension System (NPS)

NPS is a government-regulated, market-linked retirement scheme offering long-term growth through equity and debt exposure.

"NPS can be seen as a retirement-focused alternative to PPF, which is government-regulated, offers market-linked returns and a structured income stream after retirement," says Joseph.

Its key benefits include low costs, professional fund management and extra tax deductions under Section 80CCD(1B).

"However, liquidity is restricted until retirement. Partial withdrawals are allowed only for specific reasons. A portion of the corpus must be used to buy an annuity, income from which is taxable," says Maheshwari.

NPS suits long-term, disciplined investors seeking tax-efficient retirement savings.

Other tax-saving options

Apart from these, investors opting for the old tax regime have several other effective tax-saving options.

"They should first review the Rs 1.5 lakh Section 80C limit, which covers not only EPF, PPF and ELSS but also five-year tax-saving fixed deposits, Senior Citizen Savings Scheme (SCSS), Sukanya Samriddhi Yojana, life insurance premiums, home loan principal repayment and eligible tuition fees.

Beyond this, deductions can be claimed under Section 80D for health insurance premiums, under Section 80G for eligible donations, and house rent allowance (HRA) exemption for salaried individuals paying rent," says Tarun Garg, director, Deloitte India.

Match tax savings with goals

Tax-saving should be aligned with financial goals.

"Short-term needs require liquidity, medium-term goals call for balanced risk, and long-term objectives like retirement can accommodate longer lock-ins and market exposure," says Panjiar.

Choice of products should reflect age, risk appetite and time horizon.

"Younger investors with a 15 to 30 year career runway can afford higher equity exposure through ELSS or the equity component of NPS. As goals evolve, the mix should change. Early in one's career, stable instruments like EPF may dominate, while rising income and corpus-building needs allow for greater use of equity-linked options," says Joseph.

Common mistakes to avoid

The most common mistake is investing without assessing suitability and long-term implications.

"Buying insurance products without evaluating coverage needs, ignoring lock-in periods, and underestimating liquidity constraints are frequent issues," says Panjiar.

Delaying tax planning until the last minute instead of starting early in the year is a major mistake. Another is relying only on stable instruments while ignoring equity, especially for younger investors.

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Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Aslam Hunani/Rediff