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Start tax planning for 2015
We are already in the new financial year with fresh memory of last hour rush of making investments eligible under Section 80 C. Some of you might have taken decision in a hurry for which you might regret in leisure.
Are you not interested in avoiding such last minute rush and that too with probability of taking wrong decision? My advice would be, plan for these investment in advance. This will enable you invest in right products peacefully.
In this article I intend to discuss how to do tax planning for the current year right now by making sound investment decisions without having to wait for the year end.
Items eligible for deduction
These items can be divided into two categories - Mandatory and discretionary.
So first discuss the mandatory items where you do not have any choice like Insurance Premiums on your insurance policies, Tuition fee of your children, Provident contribution and EMI of your home loan etc.
A detailed discussion on these mandatory items and how this can help you in planning your investment in advance is given below for further clarity.
School Fee:
You can claim deduction in respect of tuition fee paid for the education of your two children in any school, college, university or any educational institution for full time education in India only. Since this deduction is available for only two children and in case you have more than two children, the expenses of other child can be claimed by your earning spouse. There is no monetary limit for deduction in respect of tuition fee. So even you can claim full 1 lac for tuition fee paid for your one child. The tentative amount likely to be spent under this head can be estimated in advance at the beginning of the year.
Contribution to Provident Fund:
For those of you who are salaried Provident fund contribution is also a mandatory item as this amount is deducted before the salary is paid to you. The amount of your contribution is based on your basic salary and you can fairly work out the amount of your annual PF contribution.
Life Insurance Premium:
Here you add up your annual insurance premium of all your life insurance policies whether term plan, ULIP or endowment plans. In case you are planning to take any additional insurance during the current year, please consider the premium in respect of such additional insurance. This way you will be able to work out the total insurance premium expected to be paid by you during the current financial year. Any premium paid by you on your life or on the life of your spouse or child is eligible for deduction under Section 80 C. While buying insurance policy, ensure that the amount of insurance cover should at least be equal to or more than ten times of the premium being paid by you. Moreover you are required to continue to pay the insurance premium for minimum of two years so as not to let the tax benefits already enjoyed lapse and become taxable in the subsequent year.
Repayment of principal amount of home loan:
For finding out the amount of principle component, you can request your lender to provide you a provisional certificate of interest, which will have the detailed break up of interest and principle component comprised in your total value of EMIs. If you have taken a home loan from specified institutions, you can claim the tax benefits for the principle repayment component provided you have already taken possession of the house. You are required to hold the house property for a period of five years from the end of the financial year in which you had taken the possession, failing which the tax rebates allowed to you earlier will become taxable in the year in which you sell such property. In case you have paid any stamp-duty or registration charges in respect of such house, the same also needs to be taken into account.
Discretionary Items:
For discretionary items, you will have to make investments in various instruments if you want to avail benefit of deduction of Rs. 1 lakh fully. What you need to do is to simply add up the tentative figure of all the mandatory items for the current year and arrive at the balancing figure which is discretionary amount which you need to invest in order to claim the full deduction. As far as the mandatory items are concerned, you do not have any option to choose from but for the balance you have option to choose from various items.
Under the discretionary category there are several items having different tenures and different rate of returns. Primarily the discretionary category comprises bank FDs, PPF, NSC, ELSS and deposits under Senior citizen schemes. Which items to invest in will depend on risk appetite, age and anticipated requirement of funds in the near future.
For senior citizens, the deposit under Senior Citizen Schemes or Bank fixed deposit for 5 years are appropriate. For a person who has just started earning, has reasonably longer time horizon for investment and therefore items like ELSS will work better for him. In terms of returns, ELSS scores over all other forms of investments eligible under Section 80C. But it has a lock-in period of three years hence the gains made on redemption of these units will be long-term. Moreover any profits made on ELSS are presently tax-free thereby giving you better post tax return. Other items of investments like tax saving bank FD, NSC and Senior citizen savings deposit etc. are taxable and have generally fixed rate of interest.
As explained above those who are young and have risk appetite with long-term investment horizon, they can invest the balance amount arrived as above in ELSS. Since we are at the beginning of the year, you can spread projected investment throughout the year by investing through SIP . With the help of investing in SIP, you are insulated from the short- term volatility of the stock market. With SIP in ELSS you are able to reap the benefit of rupee cost averaging concept. This is the last chance for you to take the benefit of investing in equity while availing the tax benefits as DTC 2013 proposes to discontinue the tax benefits in respect of ELSS.
The quantum of dividend shall be Rs 0.0389 per unit. The record date has been fixed as April 03, 2014.
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