Most of us think about investment and tax planning only when an employer sends out a mail suggesting to submit proof of investments. This usually happens around this time of the year so that the tax can be spread equally over the remaining three months of the financial year. If you just woke up about tax planning at this moment, it is a big mistake! If you start now, the chances are more that you will end up investing money into some products which might not be good for your financial needs. Ideally tax planning should start from the beginning of the financial year so that you don’t feel the pain of investment proof submissions, plus enough time in hand to analyze and understand the products that will fetch better results.
Let me mention about the various avenues under section 80C to make the most of your tax planning. Of course there are other sections too, but this is the most important section as it provides an opportunity to avail tax benefit on a sum up to INR 1,00,000/-. Collectively through the following options under 80C, you can save 1 Lakh from the taxable basket.
Provident Fund (PF):
The contributions that you make towards your PF from salary is the first thing that goes in 80C. For salaried class people, this amount is deducted from salary every month by the employer. This amount is matched with employers contribution too and put into your PF account maintained by either govt or a private trust. Take a look at your payslip to know the exact amount, which would be 12% of basic salary from employee contribution.
Voluntary Provident Fund (VPF):
If you like to increase PF contribution above the 12% standard limit, then it is termed as VPF. This amount also qualifies for deduction under section 80C.
Public Provident Fund (PPF):
The Public Provident Fund has been set up by the central government. You can voluntarily decide to open one if you plan to invest through this, interest paid would be around 8%, which will be revised by govt year on year. You need not be a salaried individual, you could be a consultant, a freelancer or even working on a contract basis to contribute towards PPF. You can also open this account if you are not earning. The minimum and maximum allowed investments in PPF are Rs. 500 and Rs. 70,000 per year respectively, this can included in Sec 80C deduction.
Life Insurance Premiums:
Any amount that you pay towards life insurance (either private or LIC) premium for self, spouse and children can be included in Section 80C deduction. Insurance premium paid for parents or in-laws is not considered for deduction under section 80C. Oh yeah.. Unit Linked Insurance Plans (ULIPs) are also included here :)
Equity Linked Savings Scheme (ELSS):
There are some mutual fund schemes specially created for offering tax savings called Equity Linked Savings Scheme – ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C.
Home Loan Principal Repayment:
For a given financial year, the amount that you pay towards EMI will be having 2 componenets – Interest and the Principal. Once you get a break up of these components, you can claim only the ‘Principal Repayment’ amount under section 80C.
Apart from these, there are few more options like National Savings Certificate(NSC), Post office Deposits, Fixed Deposits(FD), Senior Citizen Savings Scheme (SCSS), Infrastructure bonds and Stamp Duty towards registration charges. One thing you should keep in mind while tax planning is to ensure that you don’t exceed the amount through these channels beyond 1 lakh (which is a hard limit as of now). There is nothing wrong if you invest more, but there wont be any benefit in tax for putting your money in excess unless the returns are high.
Just to demo, let me take an example here: A person contributes to PF an amount of 25,000, Insurance premiums for another 25,000, House loan principal repayment of about Rs 40,000. Now the total amount deductible under section 80C is 90,000. So this person can plan to save another 10,000 from the tax basket by choosing among any of the options mentioned above. ELSS is the best option since it is known for higher returns. Don’t simply buy insurance policies, consider how much cover is required and plan for term insurance to get higher cover for low premiums. Invest the rest in other modes which are known to generate higher profits. Don’t ever invest just for the sake of tax savings!! If you do so, the chances are more that you will be losing more money than the tax itself on that amount!
I will cover other tax saving instruments apart from section 80C in next post.