Ideas on Tax Saving Schemes for First Time Tax Payers

by Manshu on January 12, 2012

in Tax

I’ve seen a lot of comments in the last month or so that are from people who will be paying taxes for the first time this year.

There’s a fair bit of confusion on what to do and what option to choose, so I’m writing this post with some ideas with how someone who is going to pay taxes for the first time could approach tax saving schemes.

First of all – you will have to pay tax if you earn above the taxable limit – there’s just no way around it, so stop wasting your energy in trying to devise a method which gets you to avoid this.

There are some ways in which you can reduce how much tax you’re liable for and that’s where investments come in.

There is a section in the Income Tax Act which lists down certain expenses and investments that will enable a person to reduce their taxable income and as a result of that pay less tax.

This section is called Section 80C and the graphic on this page tells you what instruments you can invest in, what is their lock in period and what returns you can expect.

If you have some education loans or housing loans then you can use that to save tax, but if you don’t have that then you can invest in either mutual funds, fixed deposits, post office schemes or insurance products to save tax.

Since this is the first time you’re doing this and it’s rather late in the day to understand the nuances of these schemes properly there are two things you can keep in mind to help you make a quick decision.

First is that ELSS mutual funds have the lowest lock in period of just 3 years among these schemes and also happen to be the only equity product in this list. This means they are mutual funds that invest in shares and there is absolutely no guarantee with them.

Your investment could halve after 3 years, or it could double – it depends on the market, and there are absolutely no guarantees.

The second thing to keep in mind is that if you’re not comfortable taking this risk then you can opt for a fixed income product where the returns are defined at the beginning of the term and you can expect the principal plus interest to be paid out to you regularly. Among these options – a tax saving bank fixed deposit is probably the easiest for you to set up and the yields are as high (if not higher) than the other options.

The limit under 80C is Rs.1 lakh and if you exhaust this limit then you can invest an additional Rs. 20,000 in tax saving infrastructure bonds and reduce some more of your taxable salary.

Finally, if you are under the 10% tax slab and expect some big expenses in the near future then it may not even make sense to block your money in these products. Just pay the tax and keep your money in the bank to meet the expenses.

Keep these things in mind while deciding where to invest to save tax, and leave a comment if you have any questions.

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