Wednesday, 29 February 2012

Tax Saving Options

renjith krishnan
Time is ticking away. Final Countdown has begun. There could be few who are still looking out for investment options to save Tax. A smart plan can not only help you to save taxes but can fetch you great returns in long run.

Here are some Tax Saving Tips:
·    Have Smart Plans for your Tax saving. Don’t wait till the last minute.
·    Invest in ELSS funds Via SIP mode. Investing one time may be risky.
·    Diversify your investment and don’t invest entire amount in one product.
·    Don’t invest with just tax savings in mind. With this attitude, you might end up buying endowment products.
As per the current income tax rules, One Lakh is the exemption under 80C.  This One Lakh is inclusive of your Provident Fund and Housing Loan Principal (in case you have taken home loan). Tuition fee paid for your children is also part of this 80C.
Effectively amount you need to invest is:
One Lakh – (PF amount + Home Loan Principal + Tuition Fees).

This means you don’t have to any additional investment, if your PF amount+ Tuition Fees + Home Loan Principal equal or exceed One Lakh.

In case you don’t have Home Loan or Children, then amount you need to invest is:
One Lakh – (PF amount)
Lets us dive and see what the available options are:
·    ELSS Mutual Funds: This is my all time favorite. Equity-linked Savings Scheme (ELSS) have 3 years lock-in period. Investment in ELSS can give you best returns that can beat the inflation. Historical data say ELSS funds have given 15% to 18% CAGR when invested for long term.  This might be last opportunity to invest in this wonderful product. Under Direct Tax Code(DTC), ELSS may no longer be an option to save tax.  
·    Public Provident Fund: This is the best debt product. The returns are good and safe investment option for conservative investor. It has a lock in period of 15 year.  Click here know the benefits of investing in PPF and interest rates for PPF investment.
·    Unit-linked Insurance Plans: Not my Favorite and it is neither the best tax saving option. In an attempt to provide insurance + saving potential, ULIP has failed to meet the expectations of the investor. Lock-in period for ULIP is 5 years.
·    National Savings Certificate (NSC): NSC is another safe option for conservative investors. NSC provides 8.4% returns compounded half yearly. Lock-in period is 5 year.  If you invest 100 Rs invested will grow to 150.9 in 5 years. The gains of NSC are taxable.
·    Tax Saving FD’s:  Tax saving FD’s is one more option for investors who are looking to saving tax. Tax saving FD’s have lock-in period of 5 years. Gains are taxable. Currently Banks are offering attractive rates. Tax saving FD’s work out best option for people in lower tax brackets.
Click here to know more about Tax Saving FD’s and Banks offering best interest rates.
·    Infrastructure Bonds: Investment up 20,000 is exempted from tax. This is in addition to 80C. Infrastructure Bonds have come with tenure of 5 to 10 years.  Interest rate offered varies between 8% to 9%. People in highest tax bracket can save upto 6000 Rs by investing 20,000 in Infrastructure bonds.
·    Insurance Premium: Premium paid for insurance are exempted from tax.  Insurance could be Endowment/Term. Don’t get yourself committed to Endowment Insurance Policies. Their returns are not great.
·    Health Insurance Premium: This is in addition to 80C. You get an exemption for premium paid. The cap for the premium is 15000 Rs. Premium above 15000 does not entitle exemption.  This is under section 80D.
What is your preferred option for tax savings?


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