23/09/2012
Smart ways to save income tax in India in 2012
By : vermataxsolutions.weebly.com
The time will soon come for filing your income tax returns (ITR form) for 2012 in India. The first three quarters of any year are the most dangerous ones for an investor’s financial planning. I say dangerous because he falls prey to people who sell products in the name of tax planning. This is the time when most investors end up with crap life insurance policies.
This is also the month when life insurance policies sales pitch go on a screaming overdrive to sell, sell and sell.
So how does one take the noise out of everything and adopt smart ways to save income tax in 2012 in India ? We list for you some of the avenues available to you today to park your money in.
Remember to invest in the below products much before filing your income tax returns (ITR forms). Also keep in mind that Direct Tax Code (DTC) might or might not be implemented but don’t fret about it yet – just invest !
Public Provident Fund (PPF)
Your investment in Public Provident Fund contributes to the Section 80C limit of Rs 1 lakh. From this year, the investment in PPF has been jacked up from Rs 70,000 to Rs 1 lakh. With the kind of guarantee this investment product brings with itself and a 8.6% return that it will now generate, I cannot think of any reason why we would neglect it especially when the income is tax free !
Remember that you need to invest a minimum of Rs 500 each year in the PPF and that it locks your money for 15 years. In the fixed income instruments, it’s a shame if one were not to invest in this.
Employee Provident Fund (EPF)
For salaried employees, the EPF is deducted compulsorily from the monthly salary and the employees contribution is eligible for tax deduction under Section 80C. Again, the income is tax free and returns are around 8.5% a year.
While the forced saving acts as a great tool for saving money for investors who are not disciplined, the fact that investors withdraw the EPF corpus and waste it away dampens the excitement around this avenue.
Life Insurance Policies
This is one of the most unsuitable products to use for the purpose at hand. For those who are caught in the investment cm insurance quagmire, this will end up being for the most easiest option. However, this is not desirable.
It does not make sense to buy Unit Linked Insurance Plans (ULIPs), endowment plans, moneyback plans and other types of life insurance policies to save tax. These products don’t offer you more than inflation (ULIP might if you stay the course of 10- 15 years). Term plans can of course and should be bought as they are the right products for insurance.
While the premium you pay can be used for tax deduction under Section 80C and while the income is tax free, DTC is mum about how this will change. My advice is to avoid putting in money in the first 3 quarters of the year in insurance policies.
Tax Planning
Tax saving mutual funds or ELSS
Tax saving mutual funds or Equity Linked Saving Schemes (ELSS) as they are loosely called are a very good way to save tax for those whose Section 80C limit is not saturated and you cannot park your money in other options available. ELSS have a lock in of 3 years and investing in them is not for the faint hearted as they take an exposure to the stock markets.
Remember to take the systematic investment planing route of ELSS while saving for income tax. I need to caveat the fact that DTC is not very clear about whether the contribution will continue to be accounted for Section 80C benefits. Wait and watch.
5 year Bank Fixed Deposits
Bank deposits for 5 years can be used towards Section 80C tax deduction. Currently, the interest that you can earn is easily a minimum of 9% per annum. Keep in mind the fact that you still need to pay tax on the maturity value that you receive after 5 years, so in that sense, your returns are lower then 9%.
NSC and SCSS
The NSC underwent a change this year. It was shortened to 5 years from 6 years and its interest is now linked to the government yield. There is also a 10 year NSC now on the offing. NSCs will offer you 8.4% this year and the income, like 5 year bank FDs will be taxable after getting added to your income.
Similarly, Senior Citizen Savings Scheme (SCSS) has become market linked and will offer 9% per annum. Senior citizens (those above the age of 60) can invest a maximum Rs 15 lakh in this with a 5 year lockin with a payout which happens every quarter. How I wish, this limit was increased.
New Pension Scheme (NPS)
The NPS was meant to create a wave in this country but seems to have died a death with innumerable tries to revive it. Meant as a retirement planning tool, the NPS invests in both equity and debt. The commissions middlemen earn are paltry so no one is selling it at all.
If one wants to use tax planning with retirement planning, then pension plans offered by insurance companies are also available as an option. Then there are pension plans offered by mutual fund houses as well.
The complete list
The above mentioned ways should be used in alignment with your asset allocation. Depending on how much you want to save for the future and your expectation of return, tax planning should be done by investing in these products. Also note that apart from these, there are other sections that should be used to save income tax.
Here is a quick listing of the various Sections available to save your income tax this year.
80C –
Payment of Life Insurance Premium (For self, spouse & children)
Contribution to Unit Linked Insurance Scheme – ULIP (For self, spouse & children)
Deposit in Public Provident Fund-PPF (For self, spouse & children)
Purchase of National Saving Certificates – NSC (Self)
Contribution to Equity Linked Savings Scheme (Self)
Payment of tuition fees for children to any School, College, University or Educational Institution
Repayment of Principal of housing loan
Fixed Deposit for 5 years with a Scheduled Bank
80CCC - Contribution to Pension Plans (Self)
80CCF - Investment in Infrastructure Bonds
24(2) - Housing Loan – Repayment of Interest (Self Occupied)
80D - Mediclaim Policy Premium (For self, spouse, children & dependent parents)
80E - Payment of interest on loan taken for higher education for a full time course
80DD - Medical treatment of handicapped dependent
80U - Deduction in case of self being totally blind or physically handicapped
have a nice tax planning....
