Make hay when the sun shines. Don't Wait for March

During the last few weeks of any financial year we make hasty decisions to invest in tax saving instruments without thinking other criterions like what is the benefit and risks involved on the investments. In the process we end up buying products which are not right for us.

April 19, 2011 6:10 IST | India Infoline News Service

In India majority of the people do not know what is tax planning and the importance of the same. Tax planning according to some people is when their employer asks to show the investment proofs so that they save tax on salary. Usually this information comes at the end of year. Most often we all wait till we get the last reminder from our employer and we start searching for instruments in which we get tax deduction – all this in a haste. During the last few weeks of any financial year we make hasty decisions to invest in tax saving instruments without thinking other criterions like what is the benefit and risks involved on the investments. In the process we end up buying products which are not right for us.


Tax planning should be done early and put in action over the year. This helps us in planning out monetary outflow in tax saving investments over the entire year instead of contributing lumpsum at end of year. It also gives us ample time to understand and analyze different options that are specific to your financial situation. 


Besides that, had you invested at the start of the tax planning season, i.e. March, you would have also earned a full year’s interest on the investments you have made. Considering the yields on five year FDs, your money would have grown close to 8% in the meanwhile. You will also have various investment options at your disposal that open only for a few days during a year like Infra bonds, 54EC capital gain saving bonds etc. So start your tax planning now!!


Let’s have brief look on various head under which you can claim tax deduction


Health Cover:


Your medical insurance premium can save you upto RS 35000 u/s 80 (D). This can include Rs 15000 premium paid for oneself, spouse and children and Rs 15000 premium paid for dependent parents or Rs 20000 premium paid for senior citizen dependent parents.


Life insurance:


This is non-negotiable especially if you have financial dependents. It is advisable to avoid buying an expensive insurance cover that tempts you by doubling up as insurance cum investment product. Stick to a pure term plan, which offers you a large cover at a very lower premium. By investing in life insurance plan, you can avail tax benefit up to Rs 1 lakh u/s 80 C.



National Saving Certificate


It is a good medium term investment option. National saving certificate (NSC) is a 6 year small saving instrument eligible for section 80C tax benefit. Rate of interest is 8% compounded half yearly, i.e. the effective annual rate of interest is 8.16%. The interest accrued every year is liable to tax (i.e. to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction. An advantage of the NSC is that it can be pledged as security against a loan to bank/Govt. institutions. The minimum investment starts from Rs 100/- and there is no maximum limit for the investment.

Public Provident Fund:


While seeking advice on investment avenues, you are likely to come across PPF which is the most the famous tax saving instrument amongst taxpayer as both contribution and returns are exempt from taxes. PPF gives you guaranteed return and it is one of the safest investment avenues available today. Ideally an investor should invest before the 5th of every month in PPF to earn interest for that month. Currently the rate of interest is 8% but is proposed to be hiked by 1% soon.


Tax saving mutual fund schemes:

If you don’t have any equity exposure at all, then the best option for you is to put all your money in an ELSS. But if you have some equity exposure, then invest in both PPF and ELSS. These schemes can also earn the maximum return from 80-C list as they invest mostly in stocks. The last 5 years return from ELSS has been in range of 20-25% compounded annually compared to 8% in NSC and PPF. The limitations in ELSS are that premature withdrawal is not allowed and the risk factor is high when compared with NSC and PPF.


Infrastructure bonds:


You can also look at investing upto RS 20000 in infrastructure bond to save tax u/s 80 CCF. This will be in addition to the overall tax deduction limit of RS 1 lakh under section 80C, 80CCC and 80CCD of income tax act. 80CCF is beneficial to those investor who has already exhausted there Rs 1 lakh limit u/s 80C. 


Housing loan:


You can save tax up to Rs 1.5 lakh u/c 80E and Rs 1 lakh u/s 80C if you are paying interest and principal toward an outstanding housing loan. But remember this is applicable for residential constructed within three financial years after the loan is taken. For example, if you and your spouse bought an apartment for Rs 60 lakhs and a down payment of Rs 15 lakhs, both will borrow Rs 22.5 lakhs each assuming the ownership share is in the ratio of 50:50. The overall tax deduction in your case will amount to Rs 5 lakhs (interest + principal). The tax benefit will be shared in the same ratio as the ration of the loan amount availed by the husband and wife. 

The idea is to give a higher ownership share and hence the higher liability to an individual with higher taxable salary. 


Pension plans


Today pension plans are available with all life insurance companies. They typically come without any life cover. Pension plans are exempted u/s 80CCC. This sections investment limit is clubbed with the limit of Sec. 80C which means that the total deduction available for 80CCC and 80C is Rs 1 lakh. On the maturity only 1/3 of maturity amount can be commuted in as tax free and rest of amount has to be used to buy a pension plan.

The Author is Sejal Patel

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