Here's how you can make 2021 your best tax saving year

Source: CNBC TV 18

The year 2020 has been one of the most uncertain years in the human era. COVID-19 pandemic made people realise that saving for the future and for uncertainty is important. Moreover, saving leads to tax planning and investors may end up paying less tax or no tax at all.

As the new year, ie. 2021, is at the corner, individuals should pledge to make the best use of the year in terms of tax saving. There are various options that one can use to save tax.

An individual can avail of a deduction of up to Rs 1.5 lakh under section 80-C of the Income Tax Act. There are various options available to avail of this exemption. Some of them give fixed returns and other returns vary as they are market-linked instruments.

For individuals in mid 50s who don`t want to take risks, as Nitin Shahi, executive director, Findoc Financial Services says, should opt for fixed return instruments such as fixed deposits, National Saving Certificate (NSC), National Pension System (NPS) and Public Provident Fund (PPF) is a better option.

"Each of them have different returns ranging from 6 percent to 10 percent and one should also consider the lock-in period of all these instruments while choosing," he suggests.

For people in the late 40`s, Shahi says that FD or NSC is a better option as the lock-in period is just 5 years as compared to PPF whose lock-in period is 15 years.

"Pension funds like SBI Pension Fund and LIC Pension Fund have been able to garner more than 10 percent in the 5 years," he explains.

For people in mid 40`s or younger, PPF and Equity Linked Saving Scheme (ELSS) are a better option for tax planning.

In the words of Shahi, "Individuals should also opt for a mix portfolio to have a balanced return with PPF providing the fixed benefit of 7-8 percent as decided by the government and using market-linked products like ELSS which can give 12-14 percent in the long term and have a lock-in period of 3 years. ELSS schemes like Axis Long term Equity Fund and DSP Tax Saver Fund have been able to give more than 12 percent returns if invested for 10 years or more."

For better tax management, investors should also calculate their tax liability under both tax regimes and opt for one involving the least tax outgo.

This year`s union budget introduced a new tax regime with a lower tax rate, in the interest of those who were unable to avail benefits under the older tax regime. However, this regime is optional.

While the new tax regime has a comparatively lower tax rate, one may have to forgo certain deductions and exemptions such as the ones available under section 80C, 80D of the Income Tax Act.

According to Sahil Arora, director, Paisabazaar, taxpayers opting for the older regime should consider investing in ELSS to reduce their tax outgo.

Investments in ELSS are eligible to be claimed as tax deduction under section 80C of the Income Tax Act, subject to an upper cap of Rs 1.5 lakh in a financial year. Apart from having the lowest lock-in period (of 3 years) amongst all 80C options, ELSS also involves higher return generating potential over the long term, as it primarily invests in equities and equity-linked investments. Equity as an asset class is usually consistently able to outperform other asset classes and inflation by a wide margin over the long term," Arora opines.

As per Aarti Raote, Partner, Deloitte India, one should claim all deductions like donations made during the year, increased medical premiums. If supported by the employer, the employees can also avail of LTC benefit by meeting the required conditions.

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