Why are we talking about tax planning? Two reasons. We have come to the end of the financial year and if you have not exhausted the Section 80C limit, the clock is ticking.
More importantly, we soon start the next financial year (April 1, 2010), so it’s a good time to get started on next year’s tax planning strategy. Face it, nobody likes to pay taxes. So be a smart tax planner and arrange your investments to minimize tax.
The first question tax payers ask is which investment they need to consider that falls under Section 80C. Wrong start! Before you figure out which investment avenue to zero in on, take into account all your deductions.
The First Four Steps
- Does your employer offer you the benefit of an Employee Provident Fund (EPF)? If yes, then take into account your deduction that goes towards the Provident Fund.
- Do you have children? If yes, then their tuition fees towards school, college or university can be deducted. But this is limited to two children.
- If you are servicing a home loan, you get a benefit on the repayment of the principal portion of the loan.
- Premiums paid on Unit Linked Insurance Plans (ULIPs) or insurance policies also fall under the purview of this section.
Once you get that out of the way, you will be able to ascertain how much you actually need to invest to touch the Rs 1 lakh limit under this section. If you are considering fixed return investments, then you have the Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year bank deposits or 5-year time deposits with the post office. All these score high on safety and offer you assured returns. You will get 8 per cent p.a. with the PPF and NSC. The post office time deposit will offer you 7.5 per cent p.a. One would have to check with the bank to see what the current 5-year tax saving deposit rates are. A senior citizen can also consider the Senior Citizen Savings Schemes (SCSS) which offers the highest 9 per cent p. a.
If you are willing to take a risk to earn a much higher return, consider an equity linked savings scheme (ELSS) which is a diversified equity fund with a tax benefit. With a lock-in period of just three years, it has the lowest tenure. Moreover, it offers a tax free return, something no other tax saving instrument offers barring the PPF.
Over the 5-year period ended January 31, 2010, the average annualised return from the tax saving funds’ category was 19.55 per cent. Even the worst performing fund (LICMF Tax Plan) delivered a return of close to 9.58 per cent while the best performer (Magnum Taxgain) earned a 29.28 per cent annual return for its investors. This is, by far, way ahead of the returns from any other instrument that falls under the purview of Section 80C. But to get a fair impression, if one takes the 3-year return, the numbers are not as impressive. The category delivered a 3-year annualised return of 5.92 per cent. The best fund (Taurus Tax Shield) delivered 17.58 per cent and the worst (Fortis Tax Advantage Plan), -4.90 per cent. As you can see, there is a risk associated with an equity fund, but in the long run, it should hand above the fixed return investments.
In between the fixed return schemes and the tax saving funds are the pension plans of mutual funds. Currently, there are only two available — Templeton India Pension Plan (TIPP) and UTI Retirement Benefit Pension Plan (UTI-RBP). These are open-end debt-oriented schemes with a maximum exposure of 40 per cent to equities.
If you have considered an ELSS, then start with a Systematic Investment Plan (SIP) from April onwards so that you keep investing periodically the entire year. Take a look at all the schemes on offer.
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