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3 easy steps to choose your tax-saving investments this year

You have exactly four weeks to finalize your tax-saving investments. In case you forgot, this is the first week of March, and you have to make your investments before 31 March to claim tax deductions on them in this financial year.

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Last Updated: Mar 02, 2020, 10.41 AM IST
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You have exactly four weeks to finalize your tax-saving investments. In case you forgot, this is the first week of March, and you have to make your investments before 31 March to claim tax deductions on them in this financial year. Oh, we are talking about Section 80C here. As you would know, Section 80C of the Income Tax Act allows tax deductions of up to Rs 1.5 lakh on certain investments. The section offers a wide range of investment options such as Public Provident Fund (PPF) , National Saving Certificate, Equity Linked Saving Scheme (ELSS), five-year tax-saving fixed deposits, just to name a few favorites.

Okay, if you are wondering why we are talking about tax-saving investments in the first week on the last month of the financial year, here is the scoop: many taxpayers love to do the running around to take care of their tax planning only in the last three months for the financial year. A sizable chunk among them love to postpone it to the last month of the financial year. Some tough ones think about it only on the last week.

Yes, it is always better to start your tax planning at the beginning of the financial year. Be it PPF or ELSS, you can invest regularly in them and claim tax deductions on your investments under Section 80C at the end of the financial year. This strategy imparts financial discipline and it will help you to organise your finances better. Also, you would invest the money in the right tax-saving option.

The right tax-saving option is something most taxpayers are always looking for. However, only a few manage to invest in the right one. Most individuals, especially those who wait for the last-minute, often choose the easy option due to paucity of time and inertia. Sometimes, they just choose the one recommended by friends or colleagues. Here is an easy way out. All you need is basic commonsense to crack it.

First, find out how much you need to invest to exhaust the tax deduction limit of Rs 1.5 lakh under Section 80C. Most individuals have an EPF (employee's provident fund) account and life insurance premium that are covered under Section 80C. Deduct the amount from Rs 1.5 lakh to find out how much you need to invest extra to exhaust Section 80C limit. Once you know the figure, we will start the process of choosing the right investment option for you.

Okay, you want to save taxes, but how long do you plan to invest the money? In other words, when do you need the money you are going to invest to claim tax deductions? If you want the money ASAP? Well, you should be prepared to wait at least five years before getting the money. The safest option, the five-year tax-saving bank fixed deposit, has a lock-in period of five years. ELSS or tax-saving mutual funds have a mandatory lock-in period of three years, but you should invest in them only if you have an investment horizon of at least five to seven years.

Also, you should invest in ELSS mutual funds only if you have a high risk appetite. These mutual fund schemes invest mostly in stocks. Equity or stocks have the potential to offer higher returns over a long period, but they can be extremely risky and volatile in the short term. Also, keep in mind that most of the other popular options such as PPF, NSC, and so on are government-backed. Even five-year tax-saving fixed deposits are mostly safe.

If you are planning to invest in ELSS mutual funds to save taxes this year, here are our recommended schemes: Best ELSS funds to save taxes in 2020

Also Read

Tax saving mutual funds for a new investor

Tax Saving Investment Options for salaried

Tax-saving guide for FY 2019-20

SIP your way through tax savings

How to invest in tax saving mutual fund schemes

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