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Tax Planning

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The new financial year has already started and it would be prudent to conduct a tax planning exercise right now. If you are a salaried person, you need to submit the investment proposals (and implement them religiously) to your employer early in the financial year. Such planning may seem uncalled for, to many individuals when an entire year is ahead, and especially when many of are still struggling to sort out the tax issues of the previous financial year. But a proper planning at the start of the financial year will help you invest judiciously in the right instruments.

In the Union Budget 2013-14, there has been no revision in tax slabs but the Government announced a tax credit of Rs. 2,000 for those who belong in the income bracket of Rs. 2 lakh to Rs. 5 lakh. A surcharge of 10% has been imposed on those whose taxable income is above Rs. 1 crore. Moreover, first-time home buyers will get an additional deduction of interest of Rs. 1 lakh for housing loans of Rs. 25 lakh or less taken in 2013-14.

Apart from the Rs. 1 lakh tax deduction benefit available under Section 80C, you could look at claiming deductions under various other sections of the Income Tax Act as well. Here are your tax-saving options:

 

SECTION 80C

LIFE INSURANCE : Many of us treat insurance as something that offers triple benefit of savings, tax exemption on premium paid and life cover (sadly, the most important aspect is considered last). Insurance agents often sell (or rather mis-sell) costly ULIPs, single premium products, various so-called guaranteed plans to people who look for tax-saving instruments. Rather than paying hefty premium for meager life coverage, you may opt to buy term insurance which provides huge life coverage at a nominal premium. For example, a 30-year old, non-smoker can get a life coverage of Rs 1 crore by paying premium as low as Rs 7,000- Rs 8000. The amount saved in paying premiums can be invested in other instruments.

PPF : The maximum investment limit in PPF is Rs 1 lakh per year. Though the interest rate has been reduced to 8.7% from this fiscal, it is still a very good investment option as both the investment and interest earned give you tax benefits. Rather than investing a lump-sum amount at the end of the financial year, deposit a certain amount within the 5th of every month to get better returns. If you have cash in your hand, you may also invest the entire amount at one go at the beginning of the financial year which will help you earn interest throughout the year.

ELSS : The lock-in period of Equity Linked Savings Scheme (ELSS) is only three years - the lowest among tax-saving instruments. It has been a proven fact that equities outperform other asset classes if the investment horizon is fairly long. Apart from tax benefits, ELSS helps create wealth over the long run because of decent returns. To minimize the market risk, it is better to invest in ELSS through SIP mode. If you start a SIP in April itself, your monthly commitment will be less of a burden on your finances.

BANK FD : Interest rates have already peaked and you can make good use of the same by investing in 5-year tax-saving bank fixed deposits. Most banks are offering interest rates in the range of 8.5% to 9.5% for 5-year deposits. Since interest rates will come down in near future, it would be better to lock in your money for a longer period of time.

NSC : Interest on small savings schemes have also been revised from April 1, 2013. For 5-year and 10-year NSCs, interest rate now stands at 8.5% and 8.8%, respectively. Besides tax benefits on invested amounts, exemption can also be claimed for the interest accrued. Moreover, one can get some liquidity from these certificates as loans are available from banks by pledging NSC certificates.

 

PRINCIPAL REPAYMENT ON HOME LOAN : You can claim deduction on repayment of principal amount of home loan, up to a maximum limit of Rs. 1 lakh per year under Section 80C.

TUITION FEES FOR CHILDREN : You can also claim deduction for payments made on tuition fees for children, provided the course is a full-time. Deduction can be claimed for a maximum of two children.

Section 80CCG

If you are a first time investor in equity with gross annual total income up to Rs 12 lakh, you may invest up to Rs. 50,000 in Rajiv Gandhi Equity Savings Scheme and can claim a deduction of 50% on your investment amount by investing directly in equity shares of the top 100 companies listed on the stock exchange. You may also buy close-ended RGESS mutual fund schemes or RGESS-enabled exchange-traded funds. There is a lock-in of three years, but there is some flexibility to exit after a year of investment.

 

SECTION 80D

HEALTH INSURANCE : The premium you pay for health insurance of your family and dependant parents also qualifies for tax exemption under Section 80D, which is in addition to the deduction availed under Section 80C. For individuals below 65 years of age, the exemption can be claimed for the actual amount paid for health insurance premium or Rs 15,000, whichever is less. For individuals above 65 years, the upper ceiling is Rs. 20,000. A deduction of Rs 15,000 more can be claimed for buying health insurance for your parents (and Rs 20,000 if either of your parents is above 65).

 

SECTION 80E

INTEREST PAID ON EDUCATION LOAN : Apart from deductions claimed under Section 80C and 80D, you can also claim tax exemption on the amount of interest paid on loan taken for the purpose of higher education, under Section 80E. While there is no limit on the interest amount, deduction is allowed for succeeding 7 years only after you start making interest payments.

SECTION 24(B)

INTEREST PAID ON HOME LOAN : You can claim tax deduction of up to Rs 1,50,000 per year from your taxable income under Section 24 (B) on the interest that you pay on the home loan.

 

SECTION 80(G)

DONATIONS TO CHARITABLE INSTITUTIONS : When you make donations to certain specified funds or charitable institutions, you are eligible to get tax deduction under Section 80G. When you make such donation, clarify whether you will get 100% or 50% deduction and if there is an upper ceiling of such deduction.

Now that you have the details of various tax-savings options, chalk out a rough estimate of your taxable income for the year. Apart from your regular salary income, don't forget to take into account interests you earn from previous investments that are lined up for the year. This exercise, conducted early on, will go a long way in maximizing the benefits offered by the Income Tax Act.

Happy Investing!!

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These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

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  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

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    1. Tax Saver MutualFunds Invest Online
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    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

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