In the earlier years, it was quite simple to choose tax saving investment options. Tax laws told you where to invest and how much to invest. So there wasn’t much leeway available. But this simplicity was also a major drawback - we were forced to invest in schemes even if they didn’t suit our financial profile.

However, with the introduction of Section 80C, while the government has more or less retained the list of tax-saving investment options, it has removed the sub-limits. This gives ample choice to each individual to plan his tax savings as per his needs. Further, Section 80L has been done away with.

Therefore, today, each one of you have to carefully assess the various options and choose those, which are right. Here are five things you must consider in order to make ‘tax savings’ a profitable exercise.

Constraint of Rs 1 Lakh Limit

Higher salaries mean higher provident fund (PF) contribution. Large home loans means higher outgo of principal. These two put together can sometimes consume a large portion of Rs 1 lakh limit in Section 80C.

Add to this, the legacy of insurance policies, expenses like tuition fees, clubbing of Section 80CCC limit with Section 80C and you may find yourself with very little limit available for further tax-saving investments.

Therefore, careful assessment is necessary to maximize gains from the balance limit. Possibly, you could skip Public Provident Fund (PPF) (see the point on PPF later) and consider Equity Linked Savings Scheme (ELSS). Investing over a three year period would reduce the normal risk associated with equity and would most likely aid in wealth creation through higher returns.

Not making lumpsum savings at the year-end We are well aware that we have to invest some money to save taxes. Yet, year after year, we tend to ignore it and wake-up only around the year-end.

This has three distinct disadvantages

1. When you have to suddenly invest a large amount in a couple of months, it strains your cash flows very badly. In fact, sometimes you may not be able to invest the full-stipulated amount or have to borrow and invest.
2. You lose out on the benefits of compounding (in case of say investment in PPF) or rupee-cost averaging (in case of investment in ELSS). Keep making year-end lumpsum investment every year and your accumulated wealth will be less than the regular investment you would make every month from the beginning of the financial year.
3. Due to the rush to complete investments, you could make mistakes in your choice of investments.

Tax saving does not begin in January and end in March. Make tax savings a monthly feature. This will not only help you prevent last-minute anxiety, but will also help choose the right options.

Make Saving in PPF a Habit

PPF is, no doubt, one of the best investment options – secured and 8% tax-free returns. But things are changing. So this year do not mechanically invest in PPF as a matter of habit. Consider the new developments before making any fresh investment in PPF.

• The Finance Minister has indicated that he will make the withdrawals from PPF account taxable. Most probably this will not apply to past investments. So this year could be fine. But, one cannot say with certainty. And, as and when, PPF withdrawals become taxable it may no longer be the most preferred option.
• Bank Fixed Deposits (FDs) of tenure not less than five years have become eligible for tax-benefit under Section 80C. So, for say, retired people who fall below the minimum tax bracket and don’t have to pay any tax on the interest earnings, this becomes a better alternative as the lock-in period is much shorter at five years vis-à-vis 15 years in PPF (and more convenient than National Savings Certificate (NSC) in post office).
• If you are not in a position to invest for 15 years, you can still earn around 7.5% to 7.75% tax-free returns from Fixed Maturity Plans of 15-18 months offered by mutual funds. But, of course, there is no Section  80C benefit.