14 February, 2008

How To Save On Tax (good article)

Courtesy:: ValueResearchOnline

What's special about January? Lots of things, actually. But from a tax point of view, it will be that time of the year when a lot of you will actually start figuring what your tax saving avenues should be. Little wonder that mutual funds report the highest inflows into equity linked savings schemes (ELSS) and life insurance companies record their highest sales in the first three months of the calendar year.

Guilty as charged? Well, here's some help. Here's the first part of our special section dedicated to tax saving. We start right now with the absolute basics.

You would have noticed that the tax department is more partial to women and specially, senior citizens. But those rates are the maximum you would have to pay if you did absolutely no tax planning.

The very first step that you have to follow is to figure out what Section 80C (of the Income Tax Act) is and how you can use it for your benefit. Any individual, irrespective of how much s/he earns, can reduce his taxable income by up to Rs 1 lakh, which is the limit under this section. You can decide how much you want to invest in each of the options or whether you intend putting the entire amount in just one of them. For instance, someone may choose to invest Rs 1 lakh in tax saving mutual funds, while another may fulfill his limit by making the payment towards his home loan. There are no sub-limits on any one of them except the Public Provident Fund (Rs 70,000 per financial year). And, tuition fees are limited to two children.

So if you are a salaried individual, check the exact amount of your contribution to the Employee Provident Fund (EPF). Also check your existing life insurance policies and pension plans. If it totals up to Rs 1 lakh, then you are done. If not, then you have to figure out where to put your money.

When making a decision on which investments to opt for under Section 80C, there are three factors to consider: time horizon, risk appetite and tax on interest.

A lot of these investment avenues have lock-in periods that extend for a number of years. For PPF, it is 15 years, for NSC, 6 years. The ones with the lowest lock-in period are ELSS (three years) and infrastructure bonds which generally start at three years. You will have to simultaneously also consider the risk factor. ELSS are the riskiest since they are diversified equity mutual funds. On the other hand you have PPF and NSC which are the safest since they are backed by the government. Finally, look at the tax implication on the return on your investment. For instance, the interest you earn on PPF is totally tax free. Not so in the case of NSC or your bank fixed deposits. But the capital appreciation on your ELSS will be totally free from any capital gains tax and the dividends you earn are tax-free too.

But there is more to tax saving than just Section 80C. If you are servicing a home loan, you would get a benefit on the principal amount being repaid under Section 80C. But you also get a tax exemption on the interest paid on the loan under Section 24. And under this section, the limit is Rs 1,50,000 in one financial year.

You would definitely be familiar with Section 80D. Under this section, you can claim an exemption on the premium you pay for your medical insurance, popularly known as mediclaim policy. There is a ceiling here though - Rs 15,000. Add Rs 5,000 to that amount if you are a senior citizen. The good news is that you can claim it not only for your own policy but also for your dependents, provided you are paying the premium.

And, if you have a charitable bent, then Section 80G is meant for you. Donations made under this section are eligible for a 50 per cent tax relief. To get a 100 per cent tax benefit, your donation will have to go to specified organisations/trusts like the Prime Minister's Relief Fund, CARE and Help Age India.

Also Refer to this article on Tax Planning.

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