Never Too Late

Pritam P Hans        Print Edition: March 2012

Had you been deferring your tax planning so far? The current financial year is about to end and there is no room for procrastination now. If you do not plan your taxes now, you will end up paying a hefty sum.

As a late planner, you will not get the maximum benefits from tax-savings instruments due to the notional loss in investment, but you can minimise the damage.

"If you have not planned taxes in advance, make sure to consider age, risk-return profile, liabilities and dependents before you invest," says Kapil Narang, COO, Ameriprise India, a financial advisory firm.

MUST READ: Investing in infrastructure bonds can help you save tax


Your tax-saving investments should depend on your financial needs and goals. These should be distributed among assets classes to reap the dual advantage of lowering tax burden as well as building your portfolio. See which tax-saving instruments provide you this edge.

DEBT ROUTE
Equities are known to offer high return over the long term. However, it does not mean you should ignore debt investments.

Provident funds: If you are an employee, you must have noticed a part of your salary going into the Employees' PF. Your contribution to the EPF is eligible for tax deduction of up to Rs 1 lakh under Section 80C (total tax deduction claimed under Section 80C for eligible investments cannot exceed Rs 1 lakh.) From the current financial year, you can also invest up to Rs 1 lakh in Public Provident Fund for an 8.6 per cent return and a deduction.

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Make sure to consider your age, risk-return profile, liabilities and dependents before investing.

Kapil Narang

COO, Ameriprise India

After the overhaul of the National Small Savings Fund, the interest rate offered on PPF investments has been benchmarked to 10-year government securities.

The money invested in PPF gets locked for 15 years, but you can take loans at 2 percentage points higher than the prevailing PPF interest rate from the third financial year to the fifth financial year of your investment. Normal withdrawals are allowed from the sixth year.

NSCs and FDs: Another safe debt option is National Savings Certificates (NSCs). In the latest issue of NSCs, you have two instruments with maturity of 5 years and 10 years with interest rates of 8.4 per cent and 8.7 per cent, respectively.

Investments up to Rs 1 lakh in NSCs are eligible for tax deductions under 80C but the interest, compounded semi-annually, is taxable. Interest rates are benchmarked to government securities of equivalent maturity periods, with 10-year NSCs offering an additional 50 basis points return.

You can also consider investing in 5-year fixed deposits. The interest accrued is taxable.

Senior citizens' savings: If you are 60, you can invest in Senior Citizens' Savings Scheme while earning a higher return. From the next fiscal, SCSS will offer an interest of 1 percentage point more than the five-year government bond. Currently, senior citizens get a 9 per cent annual interest on deposits.

The Savings Route: Tax-saving investments should be chosen from various asset classes so as to build your financial portfolio while lowering your tax burden.
You can have multiple accounts but your total investment in SCSS cannot exceed Rs 15 lakh. No withdrawals are allowed but you can close your account after a year. There is a deduction of 1.5 per cent interest if the account is closed between one and two years.

If the account is closed after two years, 1 per cent interest is deducted. The investment qualifies for deduction under Section 80C but the interest is taxable.

Infrastructure bonds: Invest in infrastructure bonds for additional deduction of Rs 20,000 under Section 80CCF. Taxpayers in the highest bracket of 30 per cent tax rate can save up to Rs 6,180 in taxes (including 3 per cent education cess on income tax). The maturity proceeds of infrastructure bonds are taxable.

EQUITY EDGE
Investment in equities come with added risk, but these also beat inflation and help build wealth.

Equity-linked savings scheme: Mutual funds that invest in equities and equities-related securities can be used to claim tax deduction under Section 80C. The lock-in period for ELSS investments is only 3 years compared with a minimum five years for other tax-saving instruments. You do not need to pay capital gains tax at redemption.

Ulips: Investments up to Rs 1 lakh in Ulips can be claimed for deductions under Section 80C. Maturity proceeds of a Ulip investment are tax-free. Though, high up-front charges and mortality rates make Ulips an expensive investment.

HYBRID OPTION
Pension funds: Building a retirement corpus will lower tax liability as contributions up to Rs 1 lakh are deductible under Section 80C. You can invest in the National Pension System (NPS), unit-linked pension plans or mutual funds. Anyone between 18 and 55 years can invest in the NPS. Tax deductions are allowed only for contributions to a tier-I NPS account with a minimum annual investment of Rs 6,000 without any premature withdrawals until the age of 60. Your employer's contribution towards your NPS account is also deductible.

EXPENSE ACCOUNT
When it comes to saving taxes, most of us scramble to invest in insurance policies we don't need or NSCs that do not fit into our financial portfolio. So, do not forget to consider your expenses as well.

House rent: Most employers include HRA in your salary. The HRA exemption limit is the least of the following: a) Actual HRA received, b) 40 per cent of the basic salary (50 per cent in metros) or c) Rent paid in excess of 10 per cent of basic salary.

If your salary does not include HRA, you can claim a deduction of up to Rs 2,000 per month for rent paid. However, you or your family should not have a house in the place of accommodation. You should also not have a self-occupied house. In this case, the least of the following can be claimed: rent paid less 10 per cent of the total income, 25 per cent of the total income and Rs 2,000 per month.

Quick tips to save tax
If you have let out a property, you can claim a 30 per cent deduction of the rental income for maintenance. You can also deduct municipal taxes paid for the property.

Home loan repayment: To make it easier for you to own a house, the taxman offers deductions against repayment of home loans. The cumulative principal amount paid as EMIs is eligible for deduction up to Rs 1 lakh under Section 80C.

If you sell the property within five years of the claim, the deduction will be reversed. The interest component of your loan EMIs will get you a higher tax saving. You can claim deductions up to Rs 1.5 lakh for interest paid under Section 24B.

Life insurance: The premium paid for a policy that covers you, your spouse and dependent children is deductible up to Rs 1 lakh under Section 80C. You can buy both cash-back endowment plans as well as term insurance plans.

Health insurance: Spending on health insurance allows a deduction up to Rs 15,000 under Section 80D for premium paid. An additional deduction of up to Rs 15,000 can be availed if you buy health cover for your parents (below 60 years). For senior citizens, the deduction limit is Rs 20,000.

Tuition fees: You can claim deduction up to Rs 1 lakh under 80C for tuition fees paid for two children. Only fees paid for full-time courses of Indian institutions are eligible for a claim. Expenditure on transportation, development fee, and hostel fees, etc, as well as coaching classes cannot be clubbed for exemption.

Education loan: An education loan for you, your spouse or children gets you a deduction under Section 80E for the interest paid. There is no cap on the deduction amount. The principal amount repayment does not qualify for the deduction.

Diseases: Treatment of certain diseases are eligible for deduction up to Rs 40,000 under Section 80DDB (Rs 60,000 for the treatment of a dependent over 65 years). You can claim the deduction for yourself or your dependent being treated.

These include neurological diseases, malignant cancers, kidney failure, AIDS and haematological disorders. The deduction cannot be claimed if the employer or an insurance company has reimbursed you.

Disability: An individual suffering from a disability can claim a deduction of Rs 50,000 under section 80U (Rs 1 lakh for severe disability). If you have a disabled dependent, a deduction of Rs 50,000 is available (Rs 1 lakh for severe disability).

Donations: You can avail of deduction up to 50-100 per cent of the donations made to charitable institutions under Section 80G. Deduction for donations made cannot exceed 10 per cent of gross total income. Donations to scientific research or rural development institutions qualify for deduction under Section 80GGA and to political parties for full deduction under Section 80GGC.

Losses: Losses incurred due to short-term equity investments or equities-based mutual funds can be offset against short-term capital gains from debt funds, gold and real estate. You can also offset such losses against long-term gains from gold and property. These losses can be carried forward up to 8 years.

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