DOES the New Year remind you about your date with the Income Tax Department? Well, you are not alone. There are many who suddenly realise that the financial year-end is only three months away. The late realisation is followed by frantic inquiries, asking friends and colleagues about where to invest and how to save on taxes before March 31. Of course, email alerts from the human resource department, asking for details of the final list of investments from employees also nudge most procrastinators into action.
While the final list of your investments may depend on your personal situation, preference and so on, we can help you draw up a general list for saving on taxes. Typically, you should consider a mix of insurance and investment to save taxes. According to experts, you should start with medical insurance, which qualifies for deduction of premium under Section 80D. The next is your life insurance premium, which qualifies for deduction under Section 80C. The life insurance cover is a must if you have people financially dependent on you. Next you should focus on Section 80C, which allows you to make investments up to . 1 lakh in listed instruments to qualify for deduction. After considering your contributions towards Employer's Provident Fund (EPF) and life insurance premium, you can look at other instruments covered under Section 80 C. The long list comprises Public Provident Fund, National Savings Certificate, five-year fixed deposits, tax planning schemes from mutual funds, principal payment on housing loan and so on. Then, there are specific deductions allowed under various sections of the I-T Act that are individual-specific. Examples include deduction for handicapped dependents, educational loan, housing loan and so on. Now, you can also save taxes by investing up to 20,000 in infrastructure bonds.
Health Cover: Your medical insurance premium can save you up to . 35,000. This can include . 15,000 premium for oneself, spouse and children and 15,000 for premium payment towards non-senior citizen dependent parents or 20,000 for paying premium towards senior citizen-dependent parents. It is advisable to have your own medical insurance cover, even if your company provides you with one, as the insurance cover ceases the moment you leave the company. Since you can't carry the same cover to the new company, you will lose the bonus points and other benefits you have earned under the old plan. If your new company doesn't provide you a cover, then you have to buy a new cover by paying a higher premium.
Life Insurance: This is non-negotiable especially if you have financial dependents who bank on your pay cheque. However, avoid buying an expensive cover that tempts you by doubling up as an investment and insurance product. Stick to a pure term cover plan, which offers you a large cover at a very low premium. Check out online plans if you want them even cheaper. Once you have purchased adequate cover, you can check out various expensive plans available — if you insist on that, that is. Now you can take a look at the other options in the long Section 80 C list. Here are some tips on how to make use of those sections the best.
Public Provident Fund: While seeking advice on investment avenues, you are likely to come across PPF the most — the eternal favourite of taxpayers — as both contributions and returns are exempt from taxes. However, experts don't approve the habit of investing in chunks in PPF in the last two months before the end of the financial year. This is because investors don't benefit from the annual return of 8%. Ideally, an investor should invest before the 5th of every month in PPF to earn interest for that month. In case of cheque payments, ensure your cheque gets cleared by this date. Don't wait for the last minute to make your PPF investments. However, it is better to now park your funds in PPF (even at the last minute) rather than leave them in your savings bank account, as you will earn higher returns. But, make your investments as soon as possible.
Tax-Planning MF Schemes: If you do not have any equity exposure at all, then the best option for you is to put all your money in an ELSS. But if you have some equity exposure, then invest in both PPF and ELSS. These schemes can also earn the maximum returns from 80-C list as they invest mostly in stocks.
Infrastructure Bonds: You can also look at investing up to 20,000 in infrastructure bonds to save taxes. This will be in addition to the overall tax deduction limit of 1 lakh under Section 80C, 80CCC and 80CCD of the I-T Act. While you can claim tax exemption of up to 20,000 by investing in infrastructure bonds, tax deduction will depend on the tax slab that you fall under. For instance, if you fall under the 30% tax slab, and you invest . 20,000 in infrastructure bonds, then one-third of . 20,000 i.e. 6,667 is eligible for tax deduction. And, if you come under the 10% tax slab, then 10% of 20,000 i.e. 2,000 is eligible for tax deduction.
Housing Loan: You can save tax up to . 1.5 lakh under Section 80E if you are paying interest towards an outstanding housing loan. But remember this is applicable for a residence constructed within three financial years after the loan is taken. For example, if you and your spouse bought an apartment for 60 lakh and made a down payment of 15 lakh, both will borrow 22.5 lakh each assuming the ownership share is in the ratio of 50:50. The overall tax deduction in your case will amount to 3 lakh. The tax benefit will be shared in the same ratio as the ratio of the loan amount availed by the husband and wife. The idea is to give a higher ownership share and hence the higher liability to an individual with higher taxable salary.
Education Loan: Have you just passed out from a B-school and taken up your first job? You can save tax on the interest component of education loans taken for higher education under Section 80E. Education loans taken from a nationalised bank come at a very low rate of interest. The borrower begins repaying the loan only when s/ he starts earning. Thus, the rates of interest that you pay are deductable from your tax payments.
The DTC Angle: Some of these options may not work once the Direct Taxes Code (DTC) Bill, 2010, replaces the existing Income Tax Act 1961. DTC is likely to come into effect from 2012. The bill has proposed certain changes in tax deductions, which are yet to be finalised. So, it's highly possible that some of your investments, which are tax-free now, may become taxable with the new code. People must take only a short-term decision for their investments, say only up to 2012. Pension funds and insurance are the best options under Section 80C. You must not go for any long-term decision, because with the new tax code, your long-term investments will not have much meaning. What is important is your overall asset allocation.
So, be wise with your investments this year. Maximise on your savings and make the most of your investments.
Sec 80C/80CCC/80CCD
Investments up to 1 lakh in NSC, 5-year tax-saver bank FDs, EPF, PPF, ELSS, life cover, Ulips, pension plans & principal payment on home loan
Sec 80D
Maximum deduction of up to 15,000 under mediclaim or health insurance offered by life insurers An additional deduction of up to 15,000 for buying cover for dependent parents Senior citizens can claim deduction up to 20,000
Sec 80DD
Deduction of 50,000 for maintenance of a disabled dependent. If the disability is severe, the deduction amount will be 100,000
Sec 80E
Tax relief on interest payments on education loan taken for higher studies for self, spouse or child
Sec 80G
The eligibility is 50% or 100% of the donation amount subject to overall ceiling of 10% of your gross total income to certain funds and charitable institutions
Sec 24
The maximum limit is of 1.5 lakh on interest payments of a home loan for a self-occupied house There is no ceiling on the amount of deduction if the house is let out or deemed to be let out
Sec 80CCF
You can invest up to 20,000 in infrastructure bonds and claim a rebate as per your tax slab This deduction is over and above the existing overall limit of up to 1 lakh under Section 80C, 80CCC and 80CCD
