Do you need to invest to save taxes?

In short:

  • For FY16-17, you have to finish your tax-saving investments before 31 March 2017
  • The limit to invest and save taxes under Section 80C is ₹1.5 lakh
  • Ask your company HR or CA how much of this limit you need to use up
  • Then add up the investments and expenses that you would have already made
  • These include contributions to EPF and PPF, life insurance premium, ULIP investments, home loan repayment, children’s tuition fees, 5-year fixed deposit investments, NSC investments and Sukanya Samriddhi investments
  • The amount left after adding all of these up is the amount you can invest in ELSS funds to further save taxes

At length:

This is the time of the year when you will be seeing ELSS all around you. For the period between 1 April 2016 and 31 March 2017, you have to finish your tax-saving investments before 31 March 2017. This period is commonly referred to as FY16-17. Since there’s less than a month to go, you would be coming across ads and articles on investing in ELSS funds. But everybody doesn’t need to invest.

ELSS funds are tax-saving mutual funds that invest in the stock market. The investments made in these funds earn a tax break under Section 80C. The limit to invest under this section is ₹1.5 lakh. But everyone does not need to use up the entire limit. How much you need to save out of this ₹1.5 lakh depends on how much you earn and your salary structure. Your company HR or CA will be able to help you figure this out.

After you have figured out how much of the 80C limit you need to use up, you should first check the expenses and investments you are already incurring or making. Do the following:

  • Look at your salary slips and figure out how much is your total contribution to EPF. Add your investments, if any, in PFF to that
  • Calculate the life insurance premium that you have paid through the year. If you’ve invested in ULIPs, take that amount into calculation as well
  • If you’ve school-going children, check the amount paid towards tuition fees
  • Add the repayment of your home loan principal amount
  • Check for other 80C investments you might have made like 5-year fixed deposits, National Savings Certificates, Sukanya Samriddhi Scheme

These are tax-saving investments and expenses that you could have made through the year. Add the amounts up and deduct it from ₹1.5 lakh. The amount that is left is the amount that you need to invest in ELSS funds to fulfill the 80C limit.

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