For tax saving, consider only a few instruments

With insurers, fund houses and others pushing products during this time, do the numbers first

In December, employees typically start getting letters from their human resource department to provide documents to support their tax-saving declaration made in March. This year, there is a twist in the tale. The Union Budget, in July, increased the Section 80C limit and home loan interest under Section 24 by Rs 50,000 to Rs 1.5 lakh and Rs 2 lakh, respectively. So, some adjustments will be required.  

Step one: Before you start rushing to buy all kinds of products to fill the gap, do some hard numbers. Look at your annual employee provident fund (EPF) contribution. If the amount exceeds Rs 1.5 lakh, then you needn't worry about tax saving. The problem lies if the amount is lesser.

Step two: Do you have a home loan? It could solve the problem. Since Section 80C allows principal payment deduction up to the entire limit, if you are falling short after the EPF contribution, use it. Also, if you are already paying annual premiums for life insurance policies and have invested in other instruments such as Public Provident Fund, National Saving Certificates and others, use them.  

Step three: The need for fresh investments and buying new instruments would only occur two circumstances. One, you do not want to invest in instruments like PPF or NSC and are still falling short of the 80C limit. Two, you want to take exposure in more aggressive instruments through the equity route so that while saving tax, you also make more money. The first choice, in such circumstances should be equity-linked savings schemes. But remember that they have a three-year lock-in period. The good part: With equity markets looking up and likely to do well for the next few years, they should give good returns. Also, the returns on redemption will be tax free. Under Section 80C, the investor in the top income-tax bracket will get a benefit of 30 per cent on the invested amount. You can also use the SIP route. But given the fact that it is already December, it would be a better idea to use the lumpsum route to save tax.

Step four: Yes, with stock markets on a roll, insurers will push unit-linked insurance plans with a high equity component. No doubt, this will save tax and have become substantially cheaper, but it will hurt you otherwise because these products do not provide enough insurance or investment. Choosing a pure-term plan to save tax will be even cheaper. As Kartik Javeri, director, Transcend India, says: "It will also mean an annual premium payment which will save tax."

Step five: Since the home loan interest component under Section D has also been increased to Rs 2 lakh, one big step you can take is reduce the tenure of the home loan, if you can afford it and especially if it is a new loan. Since the interest component is higher in the initial period of the loan tenure, you can maximise your benefits. In case of a joint loan, the annual benefit will be Rs 4 lakh.

"If you in your 20s or 30s, you can also invest the surplus and prepay a larger amount in the later years. This way, you will forego some tax benefit, but start building wealth for the future," adds Jhaveri.