Money Wise

TAX QUERIES

And this document is rather important because you will need to back this document with actual proof at the end of the year. Else, the take-home salary will have to bear the brunt of your negligence. There are different approaches followed by individuals for this. These include:

A conservative approach: A conservative's approach is to invest Rs 30,000 in provident fund (PF), Rs 35,000 in equity-linked saving schemes (ELSS) and another Rs 15,000 national saving certificates (NSC). That means a total investment of Rs 80,000 which misses the target of Rs 1 lakh that they need to invest for maximum tax benefits.

And this approach is followed because they are worried about the impact, if they are unable to carry out their investments properly. In order to save themselves any trouble, they mention a lower figure.

Also, they are also worried that about the consequences if the break-up of the investment changes. However, they need not worry about this because the total amount indicated in the declaration has to be same. And as long as this is maintained, it is perfectly fine.

It's important to remember that a conservative approach can lead to higher tax incidence. That is, if you were to invest a higher amount than proposed, it could lead to lower tax benefits.

Before going for such an option, it's important that you mention this to your company's finance department so that they are aware of your latest position and tax you accordingly.

The carefree approach: This approach is more common because here, the individual just puts some arbitrary figures against various heads in their investment declaration.

For instance, a person might put Rs 10,000 as premium on medical insurance and Rs 1 lakh as total investment for Section 80C benefits.

There is a serious risk in this approach because just putting down some numbers without thinking through the process could lead to serious loss, in terms of reduction in tax benefits.

Similarly some wrong amount might be mentioned that will disallow the expenditure. A very good example of this is the allocating Rs 1 lakh for PPF, when the maximum permissible is just Rs 70,000. So another Rs 30,000 that could have been invested in other instruments will now get wasted.

The exact approach: This is a systematic approach wherein all the options are considered and then, allocated to different instruments. For instance, allocating Rs 50,000 to PPF, another Rs 40,000 to ELSS and Rs 10,000 to NSC is a perfect example of proper allocation.

Of course, the latter approach runs the risk of changes being introduced during the year, but it is still an acceptable one because the final number should tally.

The writer is a certified financial planner