Outlines of some investment options to save tax under two sections of the Income Tax Act
Efficient tax planning not only helps you save money but also helps in investing in instruments that yield good returns. Planning well ahead is critical for individuals who are taxed at a high rate. This exercise helps them select avenues that not only provide tax relief but also helps build wealth and retirement income. Making last-minute hasty investments is not always judicious.
Instruments under Section 80C
Under Section 80C of the Income Tax Act, certain investments are deductible up to a maximum of Rs 1 lakh from your gross total income.
For risk-averse investors: Investments in PPF, NSC, NABARD bonds, Employee Provident Fund, Senior Citizen Savings Scheme, tax-saving fixed deposits and infrastructure bonds help save tax. These fixed income schemes are for the risk-averse individuals who are more inclined to protect their capital. While investors cannot expect windfalls like in the stock markets, these investments are free of volatility.
However, investors must be cautious of the inflation risk attached to fixed return investments.
ELSS: Equity-linked saving schemes (ELSS) are those mutual fund schemes that help you save tax as well as generate decent returns. These are diversified equity funds with a lock-in period of three years. Since they are linked to the markets, they carry more risk than PPF and NSC. The investor can select from different fund schemes that is in line with his risk threshold. While dividend paid out is exempt from tax, the proceeds at maturity are exempt from long-term capital gains tax.
ULIP: Unit-linked insurance plan (ULIP) is a life insurance product which provides the benefits of protection and advantages of investments. A portion of the premium paid goes towards providing life risk cover and the remaining amount is invested in the capital markets depending on your risk profile.
Instruments under Section 80CCF
Long-term infrastructure bond: In the Union Budget 2010, the finance minister proposed a new Section - 80CCF - under the Income Tax Act. This will provide an additional tax deduction, above the existing Section 80C deduction, with respect to investments made in long-term infrastructure bonds. Section 80CCF will offer a deduction of Rs 20,000, provided the investments are in long-term infrastructure bonds. This is aimed at enhancing investments in infrastructure projects in the country. The longterm infrastructure bonds will have tenure of 10 years and a minimum lock-in period of five years.
Bonds: The bonds issued by the Industrial Finance Corporation of India, Life Insurance Corporation of India, Infrastructure Development Finance Company and the Reserve Bank of India classified infrastructure finance companies will qualify for tax benefits under Section 80CCF.
Planning ahead helps you reduce your tax liability and discover opportunities to build wealth.
