Tax Planning

March is a time by when you would have already completed your tax planning and investment, but if you have not done it now is the time. Anyway you can go through this article to do your planning for the next financial year as well.

Most people have the tendency to do investment based on what comes their way or what they hear from their friends and families. This helps in saving tax, but does this type of investment meet your long term investment objective? While doing tax planning one should have a look at different investment options in conjunction with your age, needs, goals and risk-appetite.

The 2 main sections we would look at are sections 80C and 80D.

As you are aware, the maximum investment allowed as deduction from Income under section 80C is Rs. 1,00,000/-. Now depending on your income you can decide to make a lump sum investment or do it on a monthly basis. There are many items which are available as deduction under section 80C.

Let’s have a look at some of them:

Employee Provident Fund: Most companies have Employee Provident Fund, where 12% of your basic and DA are deducted as contribution to this fund. In addition to this your employer also contributes and to this fund. The amount contributed by your employer is not added to your income, so you do not pay tax on this income.

The Employee Provident fund helps in building a healthy retirement corpus. You also get an interest on the amount lying in this fund and the interest is tax free. This fund would be operative till you retire.

Public Provident Fund: This is also another way of building your retirement corpus, but this is voluntary. Anyone can open a Public Provident Fund account. The minimum contribution per annum is Rs.500 and maximum Rs.70,000/-. You also get an interest on the amount lying in this fund and the interest is tax free.

The tenure of this fund is 15 years and can be renewed by 5 years each time after that. The best part is withdrawal facility is also available, subject to certain conditions.

Pension Plans: Though this comes under a different section, investment under pension plans comes under the overall limit of Rs. 1,00,000/-

Life Insurance: Premium paid on a life insurance policy is also deductable under section 80C. The premium amount should not exceed 20% of the insured amount. Any return received against an insurance policy is tax free. One should note that insurance and investment are 2 different things and insurance should not be mixed with investment.

Housing Loan: Repayment of principal amount upto Rs. 1,00,000/- is allowed as deduction under this section. In addition interest payment on housing loan upto Rs. 1,50,000/- is allowed as deduction under Income from house property.

Tuition Fees: Whole amount of Tuition fees paid towards your childs education is allowed as deduction.

National Saving Certificate: Investment upto Rs.1,00,000/- is allowed as deduction. lock-in period is 6 years. The interest received is taxable as income from other sources, but since it is locked in, the interest is also allowed as a deduction under section 80C.

Bank Fixed Deposit: Fixed deposit for 5 years or more in a scheduled bank is allowed as a deduction. The interest earned is taxable under Income from Other Sources.

Equity Linked Saving Scheme: Only schemes notified under the income tax act are allowed as deduction. The minimum lock-in period is 3 years. Dividend received is tax free.

IPO of Infrastructure Company: As the name suggests this deduction is only available for purchase of shares of an Infrastructure Company through an IPO. Dividend received is tax free. The lock-in period is 3 years.

Deduction under section 80D

Health Insurance: Premium paid towards health insurance policy is allowed as deduction upto Rs.15,000/-

Having seen the different deduction options, let’s see what options we should look at different stages of your life.

Single: Here we assume that you are in your early stage of your career with not many liabilities. The risk taking appetite is also high. So the suggestion is to put maximum in Equity Linked Saving Scheme. But at the same time it is best to start accumulating your retirement corpus. One should look at Pension plans and Public Provident Funds.

Married without children: Being young, the risk taking appetite is high, but being married one should also try and protect one’s spouse. In addition to Equity Linked saving scheme and building a retirement corpus, one should also look at life insurance policy.

Married with children: At this stage the risk taking appetite is reduced, so the exposure to Equity Linked Saving Scheme should be reduced. People in this age group would definitely be looking for regular income to take care of children’s education, marriage and other expenses.

Increasing exposure to Public Provident Fund would help, since withdrawal is allowed, when needed. The other option is to look at National Saving Certificate and Bank Fixed Deposits. But one should note the interest is taxable. One should also look at increasing the life insurance coverage, since the numbers of persons depending on you have increased.

Pre-retirement: This is the best time to increase exposure to Pension Plans and Public Provident Fund.

Post-retirement: This is the time when a person wants to have a good life style. With the increase in tax breaks and reduction in income, this is the best time to have exposure to National Saving Certificate and Bank Fixed Deposits