Alarge number of people in India make their tax- saving invest- ments closer to March, while the ideal way to do that is to start in April itself — just when the finan- cial year starts, and contin- ue to execute the plan through the year. If one fol- lows the latter path, most people do not feel the pinch of making bunched-up in- vestments during the clos- ing months of the financial year, that is in March or even in the few months pre- ceding that.
Such a year-long execu- tion process also inculcates the habit of disciplined investing among investors, say financial planners and advisers.
In addition, if one does investments related to sav- ing taxes in March for that particular financial year, there is always a chance for such decisions to go wrong if they are not well thought out. Hence, it is im- perative to invest across the financial year and start one’s tax planning in April itself, according to financial planners and advisers.
Here are some easy to fol- low tips on how you can plan your taxes using various in- vestment tools.
SIPs in ELSS
One of the best tax- saving instruments in the mutual fund space is the equity-linked savings schemes (ELSSs), which are of- fered by mutual fund houses. If you invest in ELSSs, which are approved by the government for saving taxes, you can claim tax benefits under section 80C of the In- come Tax Act. In every ELSS, you can do a system- atic investment plan (SIP) with an ECS mandate so that every month a fixed sum of money is deducted from your account and invested in the plan. For this, all you need to do is fill up the forms for investing in an ELSS once, along with an SIP form and the bank mandate form. Once all these, along with your Know Your Customer (KYC) forms, are in place, the investments should start without any problem.
An SIP investment also allows the investor to reap the benefits of rupee-cost av- eraging. That is, you buy more when the price is low and less when prices are high, averaging out your cost of acquisition. In comparison, if you invest a lump sum amount, you may not have got the best price to invest in that ELSS.
Mix ELSS with a term plan
According to Gajendra Ko- thari, CEO, MD, Etica Wealth Management, if one is employed with a company that is covered under the employees provident fund (EPF) scheme, then he/she should find out how much he/she is paying in the same. Then one should take a term plan. “In case you don’t have a PF, you should invest in a public provident fund (PPF). But before in- vesting, you should also be sure if you can lock in your money for 15 years or so,” says Kothari. “Then you should decide if you are bet- ter off by investing in an ELSS or you can have both — a PPF and ELSS,” he adds. Some of the banks are al- lowing investors the option to invest each month in PPF through a one- time instruction. But here, make sure to invest by the 5th of every month to get the full interest in your account. Suppose after taking care of your EPF and the term plan payments, you are still left with Rs 50,000 to cover your full quota under the Rs 1-lakh limit under section 80C of the act.
In that case, you can have anSIPinanELSSofan amount that is a little over Rs 4,000 per month, so that at the end of the year you are fully covered with your Rs 1 lakh limit.
Another option, although limited to some people only, is the Rajiv Gandhi Equity Savings Scheme (RGESS). Here also you can opt for an SIP in all those funds which are RGESS approved and enjoy the tax benefits.
SIP in debt funds
At times, smart inves- tors also start monthly SIPs in Liquid Funds or short-term bond funds, and use the year-end amount to pay their insur- ance premium. If you have more than one insurance pre- mium to pay — for other family members as well — you can plan well with SIPs to pay those also. Often, such SIPs save some taxes and get you some extra mon- ey too if you compare that with keeping the money in a fixed deposit or even just leave it in your savings bank.
Other than the habit of disciplined investment and the benefits of rupee- cost averaging, planning early and in a systematic manner will also help you plan your monthly cash balances better.