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Make regular investments from the beginning of the year and avoid a last-minute rush
A large number of people in India make their tax saving investments closer to March, while the ideal way to do that is to start in April itself — just when the financial year starts, and continue to execute the plan through the year. If one follows the latter path, most people do not feel the pinch of making bunched-up investments during the closing months of the financial year, that is in March or even in the few months preceding that.
Such a year-long execution process also inculcates the habit of disciplined investing among investors, say financial planners and advisers.
In addition, if one does investments related to saving 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 imperative 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 follow tips on how you can plan your taxes using various investment tools.
SIPs in ELSS
One of the best tax saving instruments in the mutual fund space is the equity-linked s av i n g s s ch e m e s (ELSSs), which are offered 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 Income Tax Act. In every ELSS, you can do a systematic 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 averaging. 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 l u m p s u m amount, you may not have got the best price to invest in that ELSS.
Mix ELSS with a term plan
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 investing, you should also be sure if you can lock in your money for 15 years or so. Then you should decide if you are better off by investing in an ELSS or you can have both — a PPF and ELSS. Some of the banks are allowing investors the option to invest each month in PPF through a onetime 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 an SIP in an ELSS of an 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.
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