Know how much you have contributed before rushing into tax-saving options

With just two weeks left for the financial year to end, there are many who are yet to invest in products that will help them save on taxes for the current year. Ideally, each individual should plan for tax-saving investments at the start of the financial year, that is in April. However, despite several warnings from financial planners and advisers, a large number of people do not follow this rule.

Experts point out that the habit of last-minute investing to save taxes gives rise to several issues. For one, in their hurried rush, people make mistakes with investments which may turn costly in the long term. For example, if a person buys a traditional insurance product which has a high cost and is not commensurate with the risk profile of the buyer, the person may have to continue to pay premiums for three or five years. Else, the whole premium may be forfeited to the insurance company .

Secondly, such last-minute investing habits may also result in a cut in family budgets during the last three months of the financial year, leading to restricted finances for even things that may be essential to the family .

On the other hand, if you plan ahead and invest regularly, that would not result in any sudden burden on your family budget. Also, such a plan inculcates the habit of investing discipline as you save through the year.

Individual taxpayers have -under section 80C - a Rs 1.5-lakh investment limit. For salaried individuals, a part of this 80C limit gets exhausted through their contributions towards Employee Provident Fund (EPF) that their employer deducts every month. For taxpayers who are paying EMIs for their homes bought on loans from a bank or a financial institution, repayment of principal amount is also included within the 80C limit. For these two categories, even the late comers do not have to do much as most tax-saving is done almost automatically.

For those who are yet to complete their tax-saving formalities, let's take a look at some of the safer options.

On the equity side, Equity Linked Savings Schemes (ELSSs) are the best bet for investors to save taxes. These are mutual fund schemes floated by fund houses which are notified by the government to qualify as investment schemes within the 80C limit. There is a lock-in period of three years. In case of any withdrawal within the lock-in period, the investor will stand to lose the previous tax deductions.

On the debt side, one of the best tax-saving options is the Public Provident Fund (PPF).

In this, the investments are tax free, the interest that accrues to the investor over the 15-year tenure of PPF is tax free, as well as the money when it is withdrawn. The rate of interest varies every year and is usually around the average annual yield that one gets on 10-year government securities, which is called the benchmark yield. An investor can put the entire 80C limit, that is Rs 1.5 lakh, into PPF in one shot. Here, an investor can partially withdraw the PPF money after five years. The New Pension Scheme (NPS) is another tax-saving instrument that investors can opt for. Here, the investor also gets the option to choose between three types of schemes, categorised from high-risk to low-risk ones with higher exposure to equity to higher exposure to debt, and one balanced option having equal proportion of debt and equity. The investor gets to take money out only on attaining 60 years of age. According to current rules, at 60, you can withdraw a third of the accumulated corpus but the balance has to be used for buying annuity. There are tax implications on withdrawal, which make NPS less attractive.

Other than these, investors can look at tax-saving FDs, term policies from insurance companies and National Savings Certificates (NSCs) at post offices.