• 9 JUL 2018

    Do I Really Need To Make Tax Saving Investments?

    Does this thought often cross your mind? My CTC is Rs 6 lakhs should I really start looking for tax saving investments to reduce the taxable income?

    Tax saving instruments usually help in saving direct taxes.

    Before we answer your question, let’s look at non taxable components in your CTC.

    1. Medical allowance
    2. Transport allowance
    3. Food coupons
    4. HRA or House Rent Allowance
    5. LTA or Leave Travel Allowance which you get once in 2 years provided it is actually spent

    Now let’s look at investments or liabilities that can help you reduce your taxable income

    1. Interest on education loan repayment
    2. Home loan principal repayment: Up to Rs 100,000 of principal repaid is counted towards Sec 80C limit of Rs 150,000.
    3. Interest on Home loan payments: Up to Rs 200,000 can be reduced from your taxable income
    4. Child’s school fees: Up to Rs 1200 per child (maximum of 2 children) can be reduced from your taxable income
    5. Life Insurance premium: Under Sec 80C a limit of Rs 150,000.
    6. Medical Insurance premium: Under section 80D up to Rs 25,000 of premium paid ends up being reduced from your taxable income:
    7. Charitable contributions

    Now as you see the above components, you may assume that you should invest only when your tax bracket increases or you should invest only that much amount that can save your taxes.

    But this isn’t the right approach.

    The right approach is making an investment to meet your financial goals. Tax saving is an add- on which an investment plan offers. However, this add-on benefit gives you more than what you think.

    Consider, now you are earning within Rs 10 lakh p.a. so the taxes you pay are not very high but is your income going to be the same every year? Your income will increase as you scale up your career. Hence when you start investing from the very beginning you are saving Rs 1.5 lakh - the tax amount you would pay year on year. Apart from that, you are also accumulating every penny you are investing right from the start. This gives a compounding effect to your wealth.

    When it comes to tax planning you should also consider options which provide tax free returns. This is because many investment instruments provide tax benefit on the principal amount paid however the returns are taxable. A smart approach would be investing in a plan that provides tax benefit under section 80C i.e. investment amount and under section 10(10D) i.e. returns provided.

    Coming back to your question – Do you need to make tax- saving investments?

    The answer would be – YES. Tax saving investments acts as ‘cherry on the cake’. They give you the best of both worlds - returns plus tax savings. Remember if you don’t have to pay heavy direct taxes today, it doesn’t mean you won’t have to pay it tomorrow. Tax liability increases as your income increases. So even if you can save up to Rs 1.5 lakh, this amount will be saved every year. Thus, offering you dual benefits.

    You may also be interested in these articles:

    A SIP where the company invests with you

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