Instead of taking some time out at the start of the financial year, most people wait till end and end up buying a product which may or may not be as per their future need. This is not the case with only salaried class but also applies to businessman and professionals.
Pankaaj Maalde ( more)
Head - Financial Planning
I recently got a call from one of my friends who wanted to invest in an investment avenue which is eligible for tax deduction u/s80-C. He told me that it’s urgent as he needs to submit the proof of investment to his employer before 31st January’2014. He was in such a big hurry that he did not want to understand the features of the product and risk involved in the plan. I replied that we will meet in the evening and discuss the same. With my long experience in the field, I understood the need of urgency which most of the salaried people have at the end of financial year. As I was aware about his income and investment, it was very easy for me to recommend the product to my friend. But, after reaching home one thing instantly came to mind that suppose instead of contacting me, if my friend had directly contacted any agent or distributor then what would have happened? This incidence prompted me to write this article for the benefit of you all.
You all know very well that every year you have to invest Rs. 1 lakh in limited investment avenue to claim tax benefits u/s 80-C of the Income tax. Instead of taking some time out at the start of the financial year, most people wait till end and end up buying a product which may or may not be as per their future need. This is not the case with only salaried class but also applies to businessman and professionals. Still you have 2 months to finalize the best product available for tax benefit, which will also be linked to one of your financial goal.
Here are some tips for tax planning if you are looking for tax saving instrument.
► Calculate what is the exact amount still pending for investment to get the benefit u/s 80-C. If you are not sure then, consult your C.A. or Tax Consultant. You can also consult Financial Planner who can also guide which product is good depending on your financial goals.
►Deduct self EPF contribution (employer contribution is not allowed as deduction), Tuition fees paid for two children and housing loan principal repayment (if there is existing home loan) and existing life insurance premium before arriving at balance amount to be invested under the overall limit of Rs.1 lakh.
► Buy Online Term Plan for life insurance needs to protect your family in case of unfortunate event. This is very important and has to be given top priority. By thumb rule you should have minimum cover of 12 times of annual income.
► Don’t invest in traditional life insurance products, as returns from these products will not beat inflation. ULIP plans are also loaded with the irrecoverable charges like allocation charges, policy admin charges etc. which reduces your over all return. Investment in insurance does not make sense and always try separate insurance and investment.
► Businessmen and professionals must consider P.P.F. investment for tax saving, as it gives an 8.70% tax-free return which is the best in debt category. You can deposit minimum of Rs. 500 and maximum of Rs. 1lakh in your PPF account in one financial year.
► N.S.C. is also eligible for tax benefit but the interest is chargeable to tax as income from other sources. At present 5 year and 10 year NSC are available which has interest rate of 8.5% and 8.8% p.a. respectively. The interest accrued on NSC is also eligible for tax deduction.
► Mutual Fund ELSS schemes are best for those who would like to invest in equity and want to participate in growth story of India. ELSS scheme invests 100% in equity market. ELSS schemes have lowest lock in period of 3 years compared to all other products available for tax planning.
► Fixed Deposit with Banks and Post office Time Deposit for a period of 5 years is also eligible for deduction. Interest earned on deposit is chargeable to tax. The rate of interest available at present is around 9% p.a.
► Deposit in Senior Citizen Savings Scheme (SCSS) of post office also eligible for tax deduction u/s 80-C. The rate of interest is 9.20% p.a. The interest is paid quarterly.
► Investment in NPS (National Pension System) tier I account also come under eligible investment list. You should know that liquidity is very poor in this scheme and also the fund performance is not easily available for comparison. There are three options available under NPS. If the liquidity is not the issue, you can also consider the same. Returns under NPS are market linked and are not guaranteed. Minimum investment under this scheme is Rs. 500 per contribution and Rs. 6,000 per year.
►During current financial year tax credit of maximum of Rs. 2,000 is available for those whose total income is below Rs. 5lakhs u/s 87A. You should also know this before investing in any tax saving instrument.
So do not wait till end and plan well in advance. Younger investor should invest more in ELSS scheme of mutual fund where as senior people can opt for PPF deposit or N.S.C. The combination of PPF and ELSS scheme is a good option to go with, if you do not have access to professional advice.