Individual Tax Planning India by Cornerstone Wealth Management in India - The Tax saving clock is ticking

With just a few months left in the financial year, Dhruv, an executive in an MNC, has been getting one too many calls from his payroll department. They want to process his income statement, for which, they want proof of investments made by Dhruv in Section 80C instruments, which are eligible for tax deduction of up to Rs 1 lakh in a year.

When the year began, Dhruv, vowing to mend his wayward money ways, promised himself and informed payroll he would invest the entire Rs 1 lakh this year. Eight months on, he has neither saved enough to avail off the entire tax benefit nor does he have any idea of the products suited to his needs. With time running out, with payroll breathing down his neck, Dhruv is the classic case of the individual who buys into the first sales spiel he comes across and ends up making wrong decisions. He gets his tax break for the year, but ends up burdened with an investment which he will have to service for many years.

Dhruv's plight and outcome sound familiar, don't they? Most of us look at investments as an instrument to save tax in the current year, rather than as an incentive to plan for our medium- or long-term financial goals. A bit of thought, planning and discipline is all it takes.

The first step in such planning is to work out how much targeted investments you need to make. The maximum savings you can avail off by investing in Section 80C will depend on your annual income (See table: How much tax you can save). Put simply, if your annual taxable income is below Rs 1 lakh, you don't have to pay any tax and hence, you don't need any deduction.

For annual taxable income of up to Rs 2 lakh, you can bring down your tax liability to zero by investing Rs 1 lakh in saving schemes allowed under the section. Of course, you need to see whether you can afford to save that much in the first place without falling short on your running expenses.

Obviously, the sooner, the better, especially in fixed-income instruments. If your money is just going to lie idle in a bank account, you can earn higher interest on it by investing it; also, the sooner you start, the sooner that investment will mature. Rather than wait till the end of the year to invest a lump sum, invest regularly through the year. This way you can avoid the cash flow burden at the end of the year.

Lastly, it is important to diversify your investments rather than invest it all in one category. With careful planning, in consultation with your financial advisor, you could diversify your investments depending on your risk appetite, thereby maximising returns and optimising the risk that you take.

There are options aplenty on how to maximise your tax savings under Section 80C. Expenses and investments. Risk-free and risk-laden investments. Low-return and high-return potential investments. The overall investment limit is Rs 1 lakh. The limit for each individual avenue is also Rs 1 lakh, barring the PPF, where it is Rs 70,000.