The last few months of the financial year are addressed towards ensuring that the tax benefits that are available are utilised effectively. One of the most widely used benefits covers the deduction under Section 80C of the Income Tax Act and while making use of this there is a need to take a careful look at the overall strategy that one is following. This will ensure that there is no wastage of funds and that the best use of the money is possible. There are a few parameters that can be followed for this purpose and here is a detailed look at what an individual investor needs to do in this regard.
Reach the limit.
One of the first things that people with a high income needs to do is to ensure that they are making the full use of the Section 80C limit available under the Income Tax Act. This is Rs 1.5 lakh per annum and if there is no full use of the limit then it would mean that some amounts that could have been taken have been allowed to lapse. This can result in a rise in the tax liability as the reduction of the amount from the taxable income is less. The overall limit that is being utilised by the existing investments should be checked and there should be a plan to ensure that the figure that is required is achieved during the year. Some of the options that are suitable for last minute investing include those like PPF, NSC and for senior citizens the Senior Citizens Savings Scheme.
Do not make excess investments.
There are times when the individual will realise that they have already crossed the limit of Rs 1.5 lakh that has been allowed and their eligible investments are already above this figure. This is a tricky situation because it could mean that there are some additional investments that are not required but are still being made and hence an effort needs to be undertaken to try and cut down the investments. This is difficult because in some cases it might not be possible to do so with an example being the payment of an insurance premium where if this is curtailed then the benefits on the policy can be terminated. This is the reason why any investment should be checked for its future impact before it is actually made rather than during this exercise after the process has been completed. An overall review of the excess investments will show whether there can be some investments that can be cut down and the money directed elsewhere.
For some people there might not be the need to make the full use of the Section 80 C deduction because they might not have the necessary income that can be reduced by the investments. Take for example someone who has a total income of just Rs 3.5 lakh. In this case since there is no higher inflow that is present the individual need not invest more than Rs 1 lakh in order to bring down their tax liability to zero. The basic exemption limit is Rs 2.5 lakh for those below 60 years and hence this plus the Rs 1 lakh deduction will reduce the taxable income to Nil. This means that there would be a reduced pressure on the finances of the individual in trying to make the highest use of the available limits because there might not be the need for such an effort. This can help in the overall financial planning process because it will free up the amounts that can be used effectively for some other investment that can actually yield better benefits in terms of the achievement of other goals. Or it could be that the investment can yield higher returns than what would have come had the amount just been directed towards tax saving debt investments.