The Hindu Business Line : What’s on the menu for tax savings

Death and taxes are a certainty. Financial planning takes care of both of them. Earlier, tax savings were done out of compulsion, mostly in the last quarter of the financial year. But today, the scenario has changed.

Investors now plan their tax affairs and investments after considering the return potential. Generally, any investment should be weighed and assessed in three contexts.

Security/risk.

Liquidity.

Finally, returns.

Investment if not secured, or risk if not managed, can create pitfalls for the investors. Liquidity ensures the availability of funds. Returns should be strong enough to beat the inflation and fulfil other financial objectives. Therefore, one should apply all these tests before choosing from the tax-saving options available.

Under section 80C of the Income Tax Act, tax deductions are available for the following investments:

Life Insurance premium paid for policy. Eligible assesses are individuals/ HUFs.

Sum paid under contract for deferred annuity.

Contribution to Employees Provident Fund.

Contribution to Public Provident Fund.

Contribution to Recognised Provident Fund.

Contribution to approved Super Annuation Fund.

Subscription to any notified security or notified deposit scheme of the Central Government.

Contribution to Unit Trust of India for Unit Linked Insurance Plan.

Principal re-payment for housing loan.

Subscription to any notified saving certificates.

Subscription to any units of a notified Mutual Fund or the Unit Trust of India.

One should weigh and assess these deductions on the criteria of returns/safety/liquidity.

PPF (Public Provident Fund)

This is a popular investment. At present, it gives 8 per cent tax-free returns, which is as good as 11 per cent pre-tax returns for an individual who is in the highest tax slab of 30 per cent.

It is fully secured and offers guaranteed and timely returns. However, it is not very liquid and the scheme is for a period of 15 years, which is further extendable for five years.

Withdrawals are possible only from the seventh year.

INSURANCE

Insurance cover needs should be carefully assessed according to the life stage of a person and other factors.

Family size, children’s needs, earnings levels and encumbrances are factors one has to consider while deciding on the extent of the cover. It is advisable to separate Insurance from investments.

Any insurance product has, apart from mortality charges, high administrative costs, which also applies to the investment component of insurance.

Term Insurance can be an appropriate and necessary instrument for a young family with children .

One has to carefully assess one’s requirements before committing oneself because such products have a very long tenure and fixed payments.

Equity Linked Saving Schemes

ELSS is a tax saving Mutual Fund. If the risk tolerance of an investor is high, it is an ideal saving instrument for wealth creation. It scores very well on liquidity. It has only a three-yearlock-in period. Further, if you opt for the dividend plan, it can start giving you tax-free returns immediately. As maturity is not until three years, capital gains from such investments are also tax free.

Historic returns from such products have been high for three-and-five-year horizons. The risk in ELSS can be managed by opting for SIP (Systematic Investment Plan) mode. SIPs are a way to ride out the volatility of the stock markets. However, those who are retired and have a bare minimum of funds should not consider it.

National saving certificates

This is also a savings instrument managed by the Post Office. Interest income from the same is taxable because the deduction under section 80 L has been withdrawn.

As the horizon for investment is eight years, it is not that liquid. But it is a secured investment issued by the Government.

FIXED DEPOSITS WITH SCHEDULED BANKS.

With effect from 2007-2008, FDs with scheduled banks for a term of five years, if notified, are eligible for tax deductions.

This option is very suitable for retired persons, widows and others with a low risk appetite.

Due to the recent rise in interest rates, this option offers decent returns and also scores high on the yardstick of security. But interest receivable is taxable.

(The author is a Certified Financial Planner Professional, Certified by FPSB India. The views expressed are personal.)

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