5 tips for successful tax planning

The season for tax planning is already upon us. 31st March is the deadline by which we all have to file our tax returns. Unfortunately most people wait for the deadline to loom large over their heads before they  start their tax planning. In the process, what they do is they invest in the first available tax saving avenues without looking at the returns generated by those avenues. As a result, while they do save tax, they end up getting poorer. So if you want to enjoy the best of both the worlds, here are some tips you need to follow.

  • Find out your requirements. Are they short-term or long-term? If it is short-term, then your better options are post office savings, ELSS and government bonds. For long term savings, you can opt for insurance policies, PPF tax-saving bank deposits and infrastructure bonds.
  • Are you looking for high returns? Do you have a high risk-taking ability? Then ELSS and ULIPs are your best bet. Otherwise stick to good old PPF, other insurance policies, bank deposits and bonds.
  • Are you looking to make a single payment at a single shot or make frequent payments? In case of the latter, opt for PPF or ELSS, where you can make payments at regular intervals. If not, go for bank deposits, bonds or post office deposits. However when it comes to investing at periodic intervals, ensure you complete the entire investment before the year end in order to avoid paying the tax.
  • Get all the knowledge abou the products you are investing in. E.g. many people think ELSS and ULIPs need to be held only for 3 years. But this is not true as these products are dependent on the markets. So if the markets are high at the time of investing, it may so happen they may have crashed at the end of the holding period. So at that time you may find you have been stting on the loss and so may have to hold on to the investment for a long time.
  • There are other factors that should be considered when deciding on the investment. E.g when selecting ELSS or ULIPs, you need to take into account the past performance and the fund management experience. In case of ULIPs particularly, charges play a determining factor in deciding the selection of ULIPs.


Once you can do that, you can get an investment mix offering you high returns.

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The Best Tax-Saving Investment Options

We all wait till March before starting with our tax-planning. As a result, we rush through our investments before the financial year is over. In the process, we end up making poor investment choices that do save tax but do not offer attractive returns. Hence it is advisable to start our tax-planning way in advance.

Once you have decided to begin with your tax-planning, you must know where to invest to get the best possible returns. Here are some best investments.

ELSS: Nothing beats the returns from equity-linked savings schemes (ELSS), if you can handle the risk. There are many ELSS funds that have managed to give superlative returns. Choose funds with a track record of at least 5 years. The main advantage of ELSS is that it has only 3 years lock-in period, which is the least.

Insurance: Besides protecting you against unforeseen events, insurance also helps you save tax. But don’t buy insurance simply to save tax. Instead calculate how much insurance you actually need and find out if you have a shortfall. Only then, buy the insurance. If possible, opt for term plan, as it is the cheapest policy offering you highest possible life cover.

PPF: One of the oldest and the best debt products, PPF is totally exempted from tax. The sum invested, the interest earned and the maturity amount are all tax-free. However the maximum amount you can invest is only Rs. 70,000 in one financial year.

Home loan: The principal portion of your EMI for the home loan can help you in reducing your tax liability.

Premium towards medical insurance: Now you can get a deduction of up to Rs 15,000 towards the medical premium paid. This insurance could be for you or your dependants (spouse and children). If you are paying premiums for your parents, you can get further deduction of up to Rs. 15,000 ( up to Rs. 20,000 in case of senior citizens).

The way to do the tax planning smartly, is to contribute the maximum amount towards your PPF. Then invest the rest as per your financial needs. E.g. if you don’t have adequate insurance cover, first buy insurance before considering other investment options.

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