Tax saving instrument with minimum lock-in period is Equity Linked Savings Scheme (ELSS) with 3 years of lock-in, apart from it every other instrument is having minimum lock-in period of 5 years or more. So, it is very prudent to decide how much you need to invest in a tax saving instrument to avoid unnecessary blockage of fund.
However, while investing it is better to align your tax saving investments to your medium to long term goals, which you need to meet up after 3 to 5 years.
So, to know how much you should invest in a tax saving instrument you need to first determine your taxable income. Second you need to look at the different sections such as 80C, 80CCF, or 80D available to you under which you can invest and then look at the available avenues under each section and choose as per your need and preference.
Know your taxable income.
To compute your taxable income, you need to first determine your total income under all the 5 income heads.
1. Income under the head Salary.
If you are a salaried person, you need to know your gross salary, which normally includes basic salary, taxable allowances, taxable perquisites and retirement benefits. You can get all these information’s from your monthly salary slip or Form 16. One can also get the details from Form 12BA (Statement showing particulars of perquisites, other fringe benefits or amenities and profits in lieu of salary if any). After subtracting certain deductions, the balance is charged under the head salary income. Let us see the components of salary which are taxable, and which are not.
• Total taxable income: Your ‘basic salary’ is fully taxable. Further, any amount of dearness allowance, commissions and bonuses, city compensatory allowances, overtime allowance and even lunch allowance that you get is fully taxable.
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