Most of the offices today share a similar scene. Employees are worried, no, not because of economic slowdown, but because they need to give proofs of tax saving investments by a given date. After all, for most people tax is a four-letter word.
In situations like these we realize how important is tax planning. Well, better late than never! Let us understand what Tax Planning mean and look at few investment avenues that can help you do the last-minute tax saving investments.
What is tax-planning?
Tax planning amounts to knowing your tax liabilities and making investments or contributions in line with prescribed guidelines. This can lead to reduction in your overall tax liability. As per prevailing Income Tax laws, certain investments and contributions are earmarked for claiming tax benefits. When you make these investments and/or contributions, the same are deducted from your income while computing your tax liability. As a result, your overall tax liability is reduced.
While there are a number of sections in the Income Tax Act that offer opportunities for tax-planning, the most popular and pervasive one is Section 80C. You can claim deductions under Section 80C for a variety of investments – such as investments in tax-saving funds (ELSS), Public Provident Fund (PPF), National Savings Certificate (NSC), infrastructure bonds and tax-saving fixed deposits. Similarly, contributions towards provident fund, life insurance premium, repayment of the principal amount on a home loan, payment of tuition fees are also eligible for Section 80C deductions.
The Section 80C limit has been set at Rs 100,000 in a financial year. This means you can invest upto Rs 100,000 every year in the stipulated investment avenues or utilize the sum for paying life insurance premium, repaying a home loan and claim tax benefits.
Now the same has dual benefit. First, you save tax now, and second, by investing in these avenues you also create wealth.
We discuss some of the major investment avenues that offer Section 80C benefits and should form a part of your tax-planning portfolio.
1. Tax-saving mutual funds
Tax-saving mutual funds (also called equity linked savings schemes – ELSS) are equity funds that offer tax benefits under Section 80C. Essentially, like equity funds, these funds also invest their corpus in equities. However, the differentiating factor is the 3-Yr lock-in and the tax benefits. While in a regular equity fund, the investor is free to sell his investment whenever he wishes to, in a tax-saving fund, the investor must stay invested at least for a 3-Yr period. Also, investments in a regular equity fund aren’t eligible for any tax benefits, but investments in tax-saving funds are eligible for Section 80C tax benefits.
For a young investor like you who has time on his side, tax-saving funds should be the preferred tax-planning destination.
2. Public Provident Fund
Public Provident Fund (PPF) is an assured return scheme (i.e. it offers guaranteed returns) that runs over a 15-Yr period. The scheme requires recurring investments i.e. annual investments are necessary to keep the PPF account active. The minimum and maximum investment amounts are Rs 500 and Rs 70,000 respectively pa. Investments in PPF are eligible for Section 80C deductions. Also the interest income from PPF is tax-free.
At present investments in PPF offer a return of 8.0% pa, compounded annually. However, this rate is subject to revision; hence, investments in PPF may yield a higher or lower return going forward, depending on how rates are revised.
You can make smaller contributions to the PPF account. The same will help you build a risk-free corpus for the future.
3. National Savings Certificate
National Savings Certificate (NSC) is another assured return scheme. However unlike PPF, it isn’t recurring in nature. Hence, an investor is required to make a lumpsum investment that matures after 6 years. The minimum investment amount is Rs 100, while there is no upper limit for investing in NSC. Interest income from NSC is paid on maturity; the same is also taxable. Interest accrued on NSC is considered to be reinvested; hence, it is eligible for reinvestment under Section 80C.
Investments in NSC offer a return of 8.0% pa, compounded half-yearly. This rate is locked-in at the time you invest in NSC. Hence investment is insulated from any subsequent rate changes.
You can make investments in NSC for a 6-Yr period to gainfully invest one-time surpluses and to provide for needs that will arise over a corresponding time frame.
4. Tax-saving fixed deposits
You would be aware of fixed deposits offered by banks. Tax-saving fixed deposits aren’t very different. These are fixed deposits, wherein investments upto Rs 100,000 are eligible for deduction under Section 80C. Generally, Rs 100 is the minimum investment amount. Tax-saving fixed deposits have a 5-Yr investment tenure and no premature withdrawals are permitted.
At present, most banks offer a rate of return in the range of 6.5%-8.0% pa. A higher rate of return (additional 0.5%) is offered on investments made by senior citizens. Also the interest income from tax-saving fixed deposits is chargeable to tax and subject to TDS (tax deduction at source).
Tax-saving fixed deposits can be utilized like NSC, to meet future needs that will arise over a predictable period.
5. Unit linked insurance plans
Unit linked insurance plans (ULIPs) are the most “happening” offerings from the life insurance segment. Simply put, ULIPs are market-linked avenues that combine insurance and investment. Premiums paid on ULIPs are eligible for deduction under Section 80C. Though ULIPs are a long term investment product and not a 3 years contribution product as wrongly sold by insurance agents.