Categorized | Life Insurance

Tax Planning Options

Ever wondered, why you see maximum amount of advertisements and hoardings about tax planning at the end of the financial year. Why is it that only when your finance division asks you to provide proof for you tax-exemption investments, you think of last minute tax planning tools? Don’t blame the financial companies, but it is a general trend and inertia in most of us to leave it for the very last minute. Result, you may be stuck with the wrong products being sold to you or just miss to take the tax saving benefit.

As we know, all of us are eligible to a deduction of one lac rupees from our taxable income under section 80C of the Income Tax Act 1961. Nowadays, the financial market is quite matured with abundant options to save tax. Let’s discuss the options:

Employees’ Provident Fund (EPF):
Currently, the EPF interest stands at 8.5%. The fund is equally contributed by the employee and the employer. The interest earned is tax free and the instrument is Risk free.

Public Provident Fund (PPF):
PPF is one of the most effective options for retirement. The interest, which is fixed on an annual basis, is tax free at maturity. With a current change in interest rate from last years 8% per annum , it stands at 25 basis point over the government security rate. The investment limit has also been raised to 1 lac rupees.

Insurance plan:
A tool having dual benefit of insurance and tax saving along with the investment. Life insurance is eligible for tax benefits under the Income Tax Act 1961.

ULIP with a lock in of 5 years:
Unit linked insurance plans give you both – insurance and investment. But do look at the front load charges carefully.

Pension plans:
Pension plans are currently eligible for a tax rebate under Section 88 of the IT Act.

ELSS (Equity Linked Saving Scheme) with a lock in period of 3 years:
One of the most aggressive tax saving options available. This one is a mutual fund with a 3 year lock in period. The returns are linked to the market performance and non taxable as it falls under the purview of long Term capital gains.

Bank fixed deposits:
Fixed deposits of up to Rs 1 lac with a lock in period of 5years is exempted from tax. So, fixed deposits are also an important tool to save tax.
Few other schemes such as;

National savings certificate:
The reduced term stands at five year along with a newly launched product with a 10 year time frame. The interest rate which is eligible for the Tax Benefit stands at 8.9% for 10 years, 8.6% for 5 years.

Senior Citizen Savings scheme:
The interest rates a tad over 9% and the exit charge is slightly lesser than what bank’s charge on premature withdrawal.

If you are targeting tax saving, then you could also consider other types of deduction from your salary:

Education loan:
For all you fresh campus recruits, if you haven’t paid up your education loan do remember to set it off as a deduction. The interest on education loan is Deductible under 80 E.

Health Insurance:
Mediclaim up to a maximum of 15000 rupees can be factored into your exemption.

Home Loan:
Both the amount of home loan (up to 1 lac rupees) and the interest (up to 1.5 lac rupees) is deductible.

Infra Bonds:
One could look at further deductions by investing a maximum amount of 20,000 rupees in the infrastructure bonds. Infrastructure bonds are available through issues of ICICI and IDBI.

With so much to choose from, one must remember to research well and plan methodically. Never leave your investments for the end of your fiscal when you will be bogged down with so much other paper work. Also, be tuned in new tax regime and new products launched by the government every year. All this will affect your savings and your future.