NOW is the time to start tax planning!

       Now is as good a time as any to start your tax planning. The trick is to start early and take the necessary actions step by step. Tax planning is, at all times, a process, and not an occasional, sporadic exercise. This month’s column examines some of the finer points related to tax deductions — these nuances are less commonly known and it is hoped that an understanding of the same, will help the reader optimise his or her tax planning, not only in terms of paying lesser tax but also making it error-free.

     The Income Tax Act, 1960 has provided Section 80C benefit to encourage long term savings and investments. One can choose a combination of Fixed income, Life Insurance and market-linked investments like ELSS depending on one’s financial goals and investment horizon. The minimum lock-in period for section 80C investments is 3-years (for ELSS).

Available Tax Saving Instruments:

1)      Public Provident Fund – PPF is one of the most traditional tax saving instrument having a lock in period of 15 years which can be extended for 3 blocks of 5 years each. Risk Averse investors having a long term horizon may invest into PPF. The minimum contribution is as low as Rs. 500 per year

Instrument	Interest Rate	Lock in period	Tax Rebate
PPF	8.7%	15 years	u/s 80C upto Rs. 1 lakh

2)     Bank Fixed Deposits – For conservative investors with a medium term investment horizon, bank FD’s are most suitable

Instrument	Interest Rate	Lock in period	Tax Rebate
Fixed Deposit	Approx. 9-9.5% (varies from bank to bank)	5 years	u/s 80C upto Rs. 1 lakh

3)     National Savings Certificate – 

Instrument	Interest Rate	Lock in period	Tax Rebate
NSC	8.5%	5 years	u/s 80C upto Rs. 1 lakh

4)     Equity Linked Savings Scheme – ELSS comes with the shortest lock in period of 3 years. Although ELSS carries the same risk an equity mutual fund, it may also provide better returns . A lumpsum or a SIP route may be considered for the investment into ELSS depending on the need and goal of the investor.

Instrument	Interest Rate	Lock in period	Tax Rebate
ELSS	Market Linked	3 years	u/s 80C upto Rs. 1 lakh

5)     In addition to the above, premiums paid for ULIPs (3 years) , life insurance policies and pension plans also account for a tax exemption to a limit of Rs. 1 lakh u/s 80C

From the above mentioned instruments, FD’s, ELSS & ULIPs look more attractive given their lock in period and returns. While it is important to capture the benefit of these instruments, it is equally important to invest today keeping in mind the long term objective of the investor.

       Tax  Slabs applicable for FY’ 2013-14

Slab	Tax Rate Applicable
0 to Rs.2,00,000	No Tax
Rs.2,00,001 to 5,00,000	10%
Rs.5,00,001 to 10,00,000	20%
Above Rs.10,00000	30%

Why ELSS over other tax saving options under Section 80C

 Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6 years and PPF is 15 years.

 Since it is an equity linked scheme earning potential is high.

 Investor can opt for dividend option and get some gains during the lock-in period

 Investor can opt for Systematic Investment Plan

 Disadvantages of ELSS

Risk factor relatively high compared to NSC and PPF

Illustration: 

Sr. No.	Particulars	Without ELSS/80C Tax Saving Investment	With ELSS/80C Tax Saving Investment
A	Gross Total Income	Rs.7,50,000	7,50,000
B	Exemption Under Section 80C	Nil	1,00,000
C	(A-B) Total Income	Rs.7,50,000	Rs.6,50,000
D	Tax on Total Income (as per applicable slabs)	Rs.80,000	Rs.60,000
E	Tax saved on Investment	Nil	Rs.20,000

V BALAKRISHNA

IRDA registered Life Insurance Advisor,

www.licbalakrishna.com,

www.facebook.com/licbalakrishna,

Cell: 919885832381