These investment options enable tax payers to claim income tax exemption up to ₹1.50 lakh under section 80C of the Income Tax Act, 1961. An income tax exemption enables tax payer to avoid paying tax on that income.
An exemption of ₹1.50 lakh means you save ₹15,000 of your income if you fall in the 10 percent tax bracket, ₹30,000 if you fall in the 20 percent tax bracket, and ₹45,000 when you are in 30 percent tax bracket (excluding cess and surcharge).
What is March 31 deadline?
In order to claim income tax exemption, it is vital to invest in a financial instrument during the same fiscal year. This means if you want to avail income tax exemption for 2023-24, you must invest before the March 31 deadline. This leads to a rush for investments by investors.
Investing in any equity-oriented tax-saving instrument such as ELSS requires the financial markets to remain open on that day for obvious reasons. So, there is no way to invest in these schemes any longer in order to claim income tax exemption for this fiscal year which is ending on March 31 i.e., tomorrow.
Should you invest in March?
Nevertheless, taxpayers can claim exemptions by investing in other non-equity schemes such as PPF, SSY, tax-free fixed deposits, NPS, insurance, among others.
However, financial experts do not recommend investing on the last date. “If you invest in financial instruments on the last day to save taxes then there is a possibility that you may end up buying such products that may not help you to create long-term wealth such as traditional insurance policies, NSCs or 5-year tax-saving FD. That is why, it is advisable to stick to the goal-based investments as per the required asset allocation and choose the products for tax planning accordingly,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.
Key reasons to avoid rushing on the last day:
Priority is to save tax: When you invest to save income tax, the goal is to save income tax and not to earn dividend or return, or long-term wealth creation – which should ideally be the key reasons of making an investment.
Cost of investing: As mentioned above, the tax saving is limited which depends on how much money you invest and which tax bracket you fall under. In order to save tax, you may have to cough up disproportionately large sum of money. So, it does not make sense to loosen your purse string by ₹1.5 lakh in order to save ₹30,000 unless you have no other option to invest that sum.
Wealth creation: The goal of any investment – short or long term – is long-term wealth creation. So, it is recommended to create a well-rounded portfolio and allocate money to different asset classes across equity, debt and alternative investment funds (AIFs).
And tax saving is typically seen as an incentive, and not as a key goal of investment, opine financial experts of all hues.
“Tax saving is meant to be considered by investors at the start of making an investment and instruments should be chosen in view of the wealth creation. So, they should plan their finances well in advance rather than rushing to invest on the last day,” says Sridharan Sundaram, Founder of Wealth Ladder Direct.
So, when you tend to prioritise tax saving over return on an investment, you become more prone to choosing the wrong financial product.
In other words, instead of saving ₹20,000 in taxes, it is recommended to invest in a financial instrument that can enable you to earn an extra ₹25,000.
“Tax planning should start in April itself. Investors should study different financial products, their characteristics and pros & cons of investing in those products,” adds Zende.
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Published: 30 Mar 2024, 04:38 PM IST