Still not done your tax planning?
Well, there is not much time left till the financial year ends on March 31, 2008.
Come to think of it, if you are paying back a home loan or are an employee contributing to the company provident fund, you may not have the need the do any more tax-related investments.
But, if you are still confused, here’s help.
Step 1: Understand Section 80C
Under this section, investments made in certain instruments, and specific expenditures, are exempt from tax.
1. Contribution to the Provident Fund
2. Investment in Public Provident Fund
3. Payment of life insurance premium
4. Investment in pension plans
5. Investment in Equity Linked Saving Schemes of mutual funds
6. Investment in infrastructure bonds
7. Investment in National Savings Certificate
8. Investments in 5-year bank deposits
9. Payments towards the principal amount of your home loan
10. Payments towards your children’s education fees
Overall, the limit under Section 80C is Rs 1,00,000, irrespective of how much you are earn and under which tax bracket you fall.
However, there are some individual limits. The maximum you can invest in PPF is Rs 70,000 per annum. Also, under Section 80CCC, the contribution made to pension funds is subject to a maximum of Rs 10,000.
Barring these exceptions, you can choose to invest the entire Rs 1,00,000 in any investment of your choice. Or, if you are repaying a home loan and the principal repayment amounts to Rs 1,00,000, you can claim the entire amount as deduction.
Step 2: Arrive at your investment amount
If you are employee and are contributing to the provident fund, deduct that amount from the Rs 1,00,000 you can invest to save on tax.
If you are servicing a loan, deduct the principal payment.
Check if you are paying any premiums on a life insurance policy. These too can be deducted. If there is some amount still remaining, that is the amount you invest to meet the Rs 1,00,000 limit.
This balance amount can then be invested either in PPF, NSC, bank deposits or infrastructure bonds
Public Provident Fund: This 15-year investment offers 8% per annum. You pay no tax on the interest earned. There is an annual investment limit though — Rs 500 to Rs 70,000.
National Savings Certificate: This 6-year investment also offers 8% per annum. The interest earned here is taxed.
Bank deposits: You can expect around 8 per cent interest on a five-year fixed deposit. This option scores high on convenience and safety. But, the interest earned on bank deposits is taxed.
Infrastructure bonds: Financial institutions like IDBI and ICICI come out with these investments. The interest rates are determined by the institutions and you can get bonds with tenures of three and five years onwards.
Step 3: Open an SIP
If you keen on investing in tax-saving mutual funds — known as Equity Linked Savings Schemes — then you should consider investing a fixed amount every month. This is known as a Systematic Investment Plan. The mutual fund will automatically debit a fixed amount from your bank account every month and buy mutual fund units with that amount.
It is not advisable to invest in a mutual fund at one go since the price of the units varies as the stock market goes up and down. It is safer to spread your investment over a time of period.
If you open a monthly SIP now of Rs 1,000 for a year, then you will only get the benefit of Rs 3,000 for this financial year (January, February, March). The balance amount that will continue to be invested till December (which is when you will complete a year’s investment in the fund) will get added to next year’s tax calculation.
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